WORLD TRADE WT/DS2/9
20May 1996
ORGANIZATION(96-1932)
Original: English
UNITED STATES -STANDARDS FOR REFORMULATED
AND CONVENTIONAL GASOLINE
Appellate Body Report andPanel Report
Action bytheDispute Settlement Body
Atitsmeeting on20May 1996, theDispute Settlement Body adopted theattached Appellate
Bodyreporton"UnitedStates-StandardsforReformulatedandConventionalGasoline"(WT/DS2/AB/R)
andtheattachedpanelreporton"UnitedStates-StandardsforReformulatedandConventionalGasoline"
(WT/DS2/R) asmodified bytheAppellate Body report. Thepanel report should therefore beread
inconjunction with theAppellate Body report.
Both reports have been derestricted upon their adoption bytheDispute Settlement Body.RESTRICTED
WORLD TRADE WT/DS2/AB/R
29April 1996
ORGANIZATION(96-1597)
Appellate Body
United States -Standards forReformulated
and Conventional Gasoline
AB-1996-1
Report oftheAppellate BodyWT/DS2/AB/R
Page 2
WORLD TRADE ORGANIZATION
APPELLATE BODY
United States -Standards forReformulated
andConventional Gasoline
United States, Appellant
Brazil
Venezuela, Appellees
European Communities
Norway, Third ParticipantsAB-1996-1
Present:
Feliciano, Presiding Member
Beeby, Member
Matsushita, Member
I. Introductory
The United States appeals from certain conclusions onissues oflawandcertain legal
interpretations contained inthePanel Report, United States -Standards forReformulated and
Conventional Gasoline ,WT/DS2/R, 29January 1996 (the"Panel Report"). That Panel hadbeen
established toconsider adispute between theUnited States, ontheonehand, andVenezuela, later
joined byBrazil, ontheother. Thedispute related totheimplementation bytheUnited States ofits
domestic legislation known astheClean AirActof1990 (the"CAA") and, more specifically, tothe
regulation enacted bytheUnited States 'Environmental Protection Agency (the"EPA") pursuant to
thatAct, tocontrol toxic andother pollution caused bythecombustion ofgasoline manufactured in
orimported intotheUnited States. This regulation isformally entitled "Regulation ofFuels andFuel
Additives -Standards forReformulated andConventional Gasoline ",Part80ofTitle 40oftheCode
ofFederal Regulations,1andiscommonly referred toastheGasoline Rule.
140CFR 80,59Fed. Reg. 7716 (16February 1994).WT/DS2/AB/R
Page 3
A. Procedural Matters
On21February 1996, theUnited States notified theDispute Settlement Body ofitsdecision
toappeal certain conclusions onissues oflawandlegal interpretations inthePanel Report pursuant
toArticle 16oftheUnderstanding onRules andProcedures Governing theSettlement ofDisputes (the
"DSU")2andsimultaneously filed aNotice ofAppeal with theAppellate Body, pursuant toRule 20
oftheWorking Procedures forAppellate Review (the"Working Procedures ").3Thereafter, on4March
1996, theUnited States filed itsSubmission asAppellant.4Venezuela inturnfiled, on18March 1996,
itsAppellee 'sSubmission; Brazil filed onthesame dayitsAppellee 'sSubmission.5The third
participants followed, theEuropean Communities andNorway filing Submissions, on18March 1996.6
Thecomplete record ofthePanel proceedings wasduly transmitted totheAppellate Body.7
Theoralhearing contemplated byRule 27oftheWorking Procedures washeld on27and
28March 1996.8Atthehearing, oralarguments were made respectively bytheparticipants andthe
third participants. Questions were puttothem bytheMembers oftheAppellate Body hearing the
appeal. Most ofthese questions were answered orally, andsome were responded toinwriting with
theresponsesbeingfurnishedbothtotheAppellateBodyandtheotherparticipantsandthirdparticipants.9
Inaddition, theparticipants andthird participants were invited toprovide, anddidprovide, theAppellate
Body andeach other with final written statements oftheir respective positions.10Alltheparticipants
andthird participants responded positively andpunctually, which wasasource ofsatisfaction forthe
Appellate Body.
2WT/DS2/6.
3WT/AB/WP/1, 15February 1996.
4Pursuant toRule 21(1) oftheWorking Procedures .
5Pursuant toRule 22(1) oftheWorking Procedures .
6Pursuant toRule 24oftheWorking Procedures .
7Pursuant toRule 25oftheWorking Procedures .
8The oral hearing was originally scheduled for25March 1996 buthad, forexceptional andunavoidable reasons, tobe
deferred to27and 28March 1996.
9Rule 28oftheWorking Procedures .
10Rule 28(1) oftheWorking Procedures .WT/DS2/AB/R
Page 4
B. TheClean AirActanditsImplementation
TheCAA anditsimplementation bytheGasoline Rule, aredescribed fully atparagraphs 2.1-
2.13 ofthePanel Report. However, itmay beconvenient torecall anumber ofthePanel 'sfactual
findings atthisstage.
TheCAA established twogasoline programs11toensure thatpollution from gasoline combustion
does notexceed 1990 levels andthatpollutants inmajor population centres arereduced. Thefirst
program concerns ozone "nonattainment areas", consisting of(i)nine large metropolitan areas that
have experienced theworst summertime ozone pollution and(ii)various additional areas included at
therequest ofthestate governors concerned. Allgasoline sold toconsumers inthese nonattainment
areas must be"reformulated." Thesaleofconventional gasoline innonattainment areas isprohibited.
Thesecond program concerns "conventional" gasoline, which may besold toconsumers intherest
oftheUnited States. Theimplementation ofboth programs, which apply togasoline soldbydomestic
refiners, blenders andimporters, wasentrusted totheEPA. Asaresult, theEPA adopted theGasoline
Rule, which relies heavily ontheuseof1990 baselines asameans ofdetermining compliance with
theCAA requirements.
1. TheReformulated Gasoline Program
TheCAA established certain compositional andperformance specifications forreformulated
gasoline.12Thus, theoxygen content must notbelessthan2.0percentbyweight, thebenzene content
must notexceed 1.0percentbyvolume andthegasoline must befreeofheavy metals, including lead
ormanganese. Theperformance specifications oftheCAA require a15percent reduction inthe
emissions ofboth volatile organic compounds ("VOCs") andtoxic airpollutants ("toxics"), andno
increase inemissions ofnitrogen oxides ("NOx"). Section 80.41 oftheGasoline Rule setsouttwo
methods bywhich entities cancertify their gasoline asmeeting these requirements. From 1January
1995 to1January 1998, domestic refiners, blenders andimporters may useaninterim method of
certification called the"Simple Model", which requires compliance withfixed specifications concerning
Reid Vapour Pressure, oxygen, benzene andtoxics performance. Inaddition, compliance isrequired
with certain "non-degradation requirements" bymaintaining sulphur, olefins andT-90 qualities ator
below 1990 baseline levels, onanaverage annual basis. Asof1January 1998, these entities must
11Section 211(k).
12Section 211(k)(2)-(3).WT/DS2/AB/R
Page 5
comply with the"Complex Model", which more accurately predicts emissions performance. The
Complex Model isnotinissue inthepresent dispute.
2. TheConventional Gasoline Program
Inorder toprevent the"dumping" ofpollutants extracted from reformulated gasoline into
conventional gasoline, theCAA requires thatconventional gasoline soldbydomestic refiners, blenders
andimporters intheUnited States remains asclean as1990 baseline levels.13Unlike theSimple Model
forreformulated gasoline, the"non-degradation" from 1990 baseline requirements forconventional
gasoline applies inrespect ofallconventional gasoline qualities, andnotonly sulphur, olefins andT-90.
Compliance ismeasured bycomparing emissions from theconventional gasoline sold bydomestic
refiners, blenders andimporters against emissions from a1990 baseline andisassessed onanannual
average basis.14
3. Baseline Establishment Rules
Inrespect ofboth reformulated gasoline (forsulphur, olefins andT-90 requirements under
theSimple Model) andconventional gasoline (forallrequirements), 1990 baselines areanintegral
element oftheGasoline Rule enforcement process. Accordingly, theGasoline Rule contains detailed
baseline establishment rules.15Baselines canbeeither individual (established bytheentity itself) or
statutory (established bytheEPA andintended toreflect average 1990 United States gasoline quality),
depending onthenature oftheentity concerned.
(i) domestic refiners
Any domestic refiner which wasinoperation foratleast sixmonths in1990 must establish
anindividualbaselinerepresentingthequalityofgasolineproducedbythatrefinerin1990.TheGasoline
Rule provides three methods ofestablishment tobeused forthispurpose. Under Method 1,thedomestic
refiner must usethequality data andvolume records ofits1990 gasoline. IfMethod 1data isnot
available, thedomestic refiner must useits1990 gasoline blendstock quality dataand1990 blendstock
production records (Method 2).Intheevent thatMethod 2dataisnotavailable, thedomestic refiner
must establish anindividual 1990 baseline onthebasis ofitspost-1990 gasoline blendstock and/or
13Section 211(k)(8) oftheCAA.
14Section 80.90 oftheGasoline Rule.
15Section 80.91.WT/DS2/AB/R
Page 6
gasoline quality data modeled inthelight ofrefinery changes toshow 1990 gasoline composition
(Method 3).
Domestic refiners thatwere inoperation foratleast sixmonths in1990 arenotpermitted to
forego their individual baseline andusethestatutory baseline established bytheEPA. However,
domestic refiners thatcommenced operations after 1990, oroperated forlessthan sixmonths during
1990, arerequired tousethestatutory baseline established bytheEPA.
(ii) blenders
Blenders arerequired toestablish anindividual baseline representing thequality oftheir 1990
gasoline using Method 1above. Failing this, they must usethestatutory baseline established bythe
EPA. Blenders may notapply anindividual baseline using Methods 2or3.
(iii) importers
Importersofforeigngasolinearerequiredtoestablishanindividualbaselineinrespectofgasoline
importedbythemduring1990,usingMethod1.Likeblenders,importersbecomesubjecttothestatutory
baseline if,asanticipated bytheEPA, thedata necessary forMethod 1isunavailable.
TheGasolineRuledoesnotprovideforforeignrefinerindividualbaselines,althoughthepossible
useofindividual baselines forforeign refiners wasexamined bytheEPA while drafting theGasoline
Rule.Indeed,theEPA continuedtoexaminethepossibleuseofindividualbaselinesforforeignrefineries
after theadoption oftheGasoline Rule, andprepared itsMay 1994 proposal16asaresult. TheMay
1994 proposal provided forlimited usebyimporters ofindividual baselines established forforeign
refineries inorder todemonstrate thatgasoline produced atthatforeign refinery complied with the
reformulated (butnotconventional) gasoline standards. Theindividual baselines would bedetermined
using Methods 1,2or3,asfordomestic refineries under theGasoline Rule. However, theuseof
individual baselines insuch cases would beconditioned andlimited inanumber ofways. TheEPA's
May 1994 proposal never entered intoforce, astheUnited States Congress enacted legislation in
September 1994 denying thefunding necessary foritsimplementation.
1640CFR 80,59Fed. Reg. at22800 (3May 1994).WT/DS2/AB/R
Page 7
C. ThePanel Report: ItsFindings andConclusions
ThePanel 'soverall conclusions anditsrecommendation aresetoutinthefollowing terms:
8.1 Inthelight ofthefindings above, thePanel concluded thatthebaseline
establishment methods contained inPart80ofTitle 40oftheCode ofFederal
Regulations arenotconsistent with Article III:4 oftheGeneral Agreement,
andcannot bejustified under paragraphs (b),(d)and(g)ofArticle XXofthe
General Agreement.
8.2 ThePanel recommends thattheDispute Settlement Body request the
United States tobring thispartoftheGasoline Rule intoconformity with its
obligations under theGeneral Agreement.17
Onroute toitsoverall conclusions, thePanel made thefollowing principal findings:
(i) thatthePanel 'sterms ofreference were established after the75percentrulehadceased
tohave anyeffect, andtherulehadnotbeen mentioned intheterms ofreference, and
that, inanycase, itwasunnecessary, inview offindings (ii),(iv), (v)and(vii)below,
todetermine whether themeasure atissue wasinconsistent with Article I:1ofthe
General Agreement onTariffs andTrade 1994 (the"General Agreement ");18
(ii) thatimported anddomestic gasoline were "like products" andthatsince, under the
baseline establishment rules oftheGasoline Rule, imported gasoline waseffectively
preventedfrombenefittingfromasfavourablesalesconditionsaswereaffordeddomestic
gasoline byanindividual baseline tiedtotheproducer ofaproduct, imported gasoline
wastreated "less favourably" thandomestic gasoline. Thebaseline establishment rules
oftheGasoline Rule were accordingly inconsistent with Article III:4 oftheGeneral
Agreement ;19
(iii) that, inview offinding (ii),itwasnotnecessary toexamine theconsistency ofthe
Gasoline Rule with Article III:1;20
17Panel Report atp.47.
18Panel Report, para. 6.19.
19Panel Report, para. 6.16.
20Panel Report, para. 6.17.WT/DS2/AB/R
Page 8
(iv) that the"aspect ofthebaseline establishment methods" found inconsistent with
Article III:4 was notjustified under Article XX(b) oftheGeneral Agreement as
"necessary toprotect human, animal orplant lifeorhealth";21
(v) thatthe"maintenance ofdiscrimination between imported anddomestic gasoline"
contrary toArticle III:4 wasnotjustified under Article XX(d) as"necessary tosecure
compliance with laws orregulations which arenotinconsistent with theprovisions
of[theGeneral] Agreement";22
(vi) thatclean airwasanexhaustible natural resource within themeaning ofArticle XX(g)
oftheGeneral Agreement ;23
(vii) thatthebaseline establishment rules found tobeinconsistent with Article III:4 could
notbejustified under Article XX(g) asameasure "relating to"theconservation of
exhaustible natural resources;24
(viii) thatitwasunnecessary, inthelight offinding (vii), todetermine whether themeasure
atissue was"made effective inconjunction with restrictions ondomestic production
orconsumption";25
(ix) thatitwasunnecessary, inthelight offinding (vii), todetermine whether themeasure
atissue mettheconditions intheintroductory clause ofArticle XX(sometimes referred
toasthechapeau ofArticle XX);
(x) thatitwasunnecessary, inview offindings (ii),(iv),(v)and(vii), todetermine whether
themeasure atissue wasinconsistent with Article XXIII:1(b) ashaving nullified and
impaired benefits accruing under theGeneral Agreement ;26and
21Panel Report, para. 6.29.
22Panel Report, para. 6.33.
23Panel Report, para. 6.37.
24Panel Report, para. 6.40.
25Panel Report, para. 6.41.
26Panel Report, para. 6.42.WT/DS2/AB/R
Page 9
(xi) thatitwasunnecessary, inthelight offindings (ii),(iv), (v)and(vii), todetermine
whetherthemeasureatissuewasinconsistentwithArticles2.1and2.2oftheAgreement
onTechnical Barriers toTrade (the"TBT Agreement ").27
II. Issues Raised InThis Appeal
A. TheClaims ofError bytheUnited States
Itisimportant tofocus upon thesubject matter ofthisappeal. Weseek todothisfirst by
identifying theissues which have been raised bytheAppellant, theUnited States. Inwhat follows
wehighlight those same issues bylisting certain other issues dealt with inthePanel proceedings but
which have notbeen brought before theAppellate Body inthisappeal, andwhich weaccordingly exclude
from consideration inthisAppellate Report.
InitsNotice ofAppeal, dated 21February 1996, anditsAppellant 'sSubmission, dated 4March
1996, theUnited States claims that thePanel erred inlaw, firstly, inholding thatthebaseline
establishment rules oftheGasoline Rule arenotjustified under Article XX(g) oftheGeneral Agreement
and, secondly, initsinterpretation ofArticle XXasawhole.
More specifically, theUnited States assigns aserror theruling ofthePanel thatthebaseline
establishment rules donotconstitute a"measure" "relating to"theconservation ofclean airwithin
themeaning ofArticle XX(g) oftheGeneral Agreement .Consequently, itisalsotheview oftheUnited
States that thePanel erred infailing toproceed further initsinterpretation andapplication of
Article XX(g), andinnotfinding thatthebaseline establishment rules satisfy theother requirements
ofArticle XX(g) andtheintroductory provisions ofArticle XX.
Thesharply limited scope ofthisappeal isunderscored bynoting thenumber offindings which
thePanel hadmade butwhich have notbeen appealed from bytheUnited States. Very briefly, the
United States does notappeal from thefindings orrulings made bythePanel on,orinrespect of,the
consistency ofthebaseline establishment rules with Article I:1, Article III:1, Article III:4, and
Article XXIII:1(b) oftheGeneral Agreement andtheapplicability ofArticle XX(b) andArticle XX(d)
oftheGeneral Agreement andoftheTBTAgreement .Understandably, theUnited States hasalsonot
27Panel Report, para. 6.43.WT/DS2/AB/R
Page 10
appealed from thePanel 'sruling thatclean airisanexhaustible natural resource within themeaning
ofArticle XX(g) oftheGeneral Agreement .
B. TheClaims oftheAppellees andtheArguments oftheThird Participants
TheAppellees, Venezuela andBrazil, submit thattheAppellate Body should dismiss theUnited
States 'appeal anduphold thePanel 'sfindings andconclusions concerning Article XX(g). Inparticular,
Venezuela andBrazil support thePanel 'sfinding thatthemeasure atissue before thePanel wasnot
one"relating to"theconservation ofexhaustible natural resources. Venezuela alsostates thatameasure
canonly be"relating to"or"primarily aimed at"conservation ifthemeasure wasboth: (i)primarily
intended toachieve aconservation goal; and(ii)hadapositive conservation effect.
Venezuela argues that, astheUnited States hasnotmetitsburden with respect tothe"relating
to"requirement ofArticle XX(g) inthisappeal, theAppellate Body may uphold thePanel Report on
thisissue alone, anditisnotnecessary toaddress theadditional requirements ofArticle XX(g), nor
therequirements intheArticle XXchapeau.
IftheAppellate Body overturns thePanel 'sfindings onthe"relating to"component of
Article XX(g) anddoes proceed toexamine theother requirements ofArticle XX(g), Venezuela and
Brazil submit thattheUnited States hasalsofailed todemonstrate thatthose requirements have been
satisfied. They argue thatthemeasure inissue isnot"made effective inconjunction with restrictions
ondomestic production orconsumption" astherestrictions arenotimposed asdirect limits onthe
production orconsumption ofclean air,butrather upon theconsumption ofcertain kinds ofgasoline.
They further submit thatclean airdoes notqualify asan"exhaustible natural resource" within the
meaning ofArticle XX(g).
With regard totherequirements inthechapeau toArticle XX, Venezuela andBrazil submit
thatthemeasure isapplied inamanner which constitutes "arbitrary orunjustifiable discrimination
between countries where thesame conditions prevail." Venezuela argues thatthemeasure constitutes
a"disguised restriction oninternational trade" aswell.
TheAppellees alsoraise theconditional argument that, iftheAppellate Body were tooverturn
thePanel 'sfindings onArticle XX(g), andnotfindinfavour ofVenezuela andBrazil astotheother
requirements ofArticle XX, itwould then need toexamine their claims under theTBT Agreement.WT/DS2/AB/R
Page 11
Thethirdparticipants,theEuropeanCommunitiesandNorway,endorsethePanel'sinterpretation
of"relating to"andthePanel 'sfindings under Article XX(g). They finditdifficult toaccept theUnited
States 'arguments thatthemeasure atissue was"made effective inconjunction with restrictions on
domestic production orconsumption," asthemeasure inissue didnotimpose restrictions onclean
air. With regard totheArticle XXchapeau criteria, theEuropean Communities andNorway both
submit thatthemeasure isapplied inamanner constituting "arbitrary orunjustifiable discrimination
betweencountrieswherethesameconditionsprevail"anda"disguisedrestrictiononinternationaltrade."
C. ThePreliminary Question
Apreliminary question wasraised bytheUnited States attheoralhearing concerning arguments
made byVenezuela andBrazil intheir respective Appellees 'Submissions ontheissues ofwhether
clean airisanexhaustible natural resource within themeaning ofArticle XX(g) andwhether thebaseline
establishment rules areconsistent with theTBT Agreement .Thegistofthepreliminary question is
thattheabove issues andtherelated arguments made byVenezuela andBrazil were notproperly brought
before theAppellate Body inthisappeal inaccordance withtheWorking Procedures .Itwasunderscored
bytheUnited States thatVenezuela andBrazil hadnotappealed from theruling ofthePanel onthe
clean airissue orfrom thenon-ruling ofthePanel ontheapplicability oftheTBTAgreement .Venezuela
andBrazil hadnotfiled Appellants 'Submissions under Rule 23(1) oftheWorking Procedures .Neither
hadVenezuela norBrazil filed separate appeals under Rule 23(4) oftheWorking Procedures .Their
arguments onthese twomatters hadbeen made intheir Appellees 'Submissions pursuant toRule 22
and, asAppellees, Venezuela andBrazil could notchallenge thePanel 'sfinding ontheclean airissue
anditsnon-finding ontheTBT Agreement 'sapplicability.
Attheoralhearing, inresponse toquestions posed bytheAppellate Body, Venezuela andBrazil
confirmed thatthey, indeed, were notappealing thementioned twomatters. They went on,however,
tostate thatthey believed itwould bewithin thescope ofauthority oftheAppellate Body, ifitfound
itnecessary todoso,toaddress theresults ofthePanel 'sexamination ofthose twoissues.
InitsPost-Hearing Memorandum, theUnited States asserted, among other things, thatwere
theAppellate Body totakeuptheabove twomatters inthepresent appeal, unfairness would begenerated
vis-à-vistheUnitedStatesanditwouldencourageadisregardoftheWorkingProcedures.Suchdisregard
bytheAppellate Body would, itwasfurther stated, create difficulties forthird parties whowould have
tomake uptheir minds tobecome third participants ornotonthebasis oftheissues raised onappeal
assetoutintheNotice ofAppeal andtheAppellant 'sSubmission. TheUnited States itself hadnotWT/DS2/AB/R
Page 12
raised theclean airissue andtheapplicability oftheTBTAgreement initsappeal, andtheUnited States
wastheonly Appellant inAB-1996-1.
WefindtheUnited States 'submissions onthispreliminary question persuasive. Thearguments
raised byVenezuela andBrazil ontheclean airandTBT issues maybeseentobe,ineffect, conditional
appeals, thatis,conditional ontheAppellate Body 'soverturning thePanel 'soverall findings on
Article XX(g) andnotfinding infavour ofVenezuela andBrazil astotheother requirements of
Article XX. This condition isnotfulfilled. Even ifthiscondition hadbeen fulfilled, theAppellate
Body would have been most reluctant topass upon these twoissues. Weobserve, inthefirstplace,
thattheissues infactraised bytheAppellant, theUnited States, arenotofthekind which cannot be
decided without atthesame time necessarily resolving theclean airissue ortheapplicability ofthe
TBT Agreement .Inthesecond place, todeal with those twoissues, under thecircumstances ofthis
appeal, would have required theAppellate Body casually todisregard itsown Working Procedures
andtodosointheabsence ofacompelling reason grounded on,forinstance, fundamental fairness
orforce majeure .Venezuela andBrazil could have appealed thePanel 'sfinding andnon-finding on
thetwomatters bytaking advantage ofRules 23(1) or23(4) oftheWorking Procedures andthereby
placing theAppellate Body inaposition todispose ofthose issues directly inoneandthesame appellate
proceeding.
Theacceptance byVenezuela andBrazil oftheWorking Procedures ,andtheir commitment
tothem, isnotinquestion. Wehave nooption, however, buttofindthattheroute they chose for
addressing thetwoissues inquestion isnotcontemplated bytheWorking Procedures ,andtherefore,
these issues arenotproperly thesubject ofthisappeal.WT/DS2/AB/R
Page 13
III. The Issue ofJustification Under Article XX(g) oftheGeneral Agreement
Article XX(g) needs tobesetoutinfull:
Article XX
General Exceptions
Subject totherequirement thatsuch measures arenotapplied ina
manner which would constitute ameans ofarbitrary orunjustifiable
discrimination between countries where thesame conditions prevail, ora
disguised restriction oninternational trade, nothing inthisAgreement shall
beconstrued toprevent theadoption orenforcement byanycontracting party
ofmeasures:
...
(g) relating totheconservation ofexhaustible natural resources
ifsuch measures aremade effective inconjunction with
restrictions ondomestic production orconsumption;
...
A. "Measures"
Theinitial issue weareasked tolook atrelates totheproper meaning oftheterm "measures"
asused both inthechapeau ofArticle XXandinArticle XX(g). Thequestion iswhether "measures"
refers totheentire Gasoline Rule or,alternatively, only totheparticular provisions oftheGasoline
Rule which deal with theestablishment ofbaselines fordomestic refiners, blenders andimporters.
Cast intheforegoing terms, theissue does notappear tobealiveone. True enough thePanel
Report used differing terms, orterms ofshifting reference, indesignating the"measures" indifferent
parts oftheReport. ThePanel Report, however, held only thebaseline establishment rules ofthe
Gasoline Rule tobeinconsistent withArticle III:4, totheextent thatsuch rules provided "less favourable
treatment" forimported than fordomestic gasoline. These arethesame provisions which thePanel
evaluated, andfound wanting, under thejustifying provisions ofArticle XX(g). ThePanel Report
didnotpurport tofindtheGasoline Rule itself asawhole, oranypartthereof other than thebaseline
establishmentrules,tobeinconsistentwithArticleIII:4;accordingly,therewasnoneedatalltoexamine
whether thewhole oftheGasoline Rule oranyofitsother rules, wassaved orjustified byArticle XX(g).
ThePanel herewasfollowing thepractice ofearlier panels inapplying Article XXtoprovisions found
tobeinconsistent with Article III:4: the"measures" tobeanalyzed under Article XXarethesameWT/DS2/AB/R
Page 14
provisions infringing Article III:4.28These earlier panels hadnotinterpreted "measures" more broadly
under Article XXtoinclude provisions notthemselves found inconsistent with Article III:4. Inthe
present appeal, noonehassuggested intheir final submissions thattheAppellate Body should examine
under Article XXanyportion oftheGasoline Rule other than thebaseline establishment rules held
tobeinconflict with Article III:4. Noonehasurged aninterpretation of"measures" which would
encompass theGasoline Rule initstotality.29
Attheoralhearing andinitsPost-Hearing Memorandum, theUnited States complained about
thedesignation ofthebaseline establishment rules inthePanel Report andbytheAppellees Venezuela
andBrazil, insuch terms as"the difference intreatment", "the lessfavourable treatment" or"the
discrimination." Itis,ofcourse, truethatthebaseline establishment rules hadbeen found bythePanel
tobeinconsistent with Article III:4 oftheGeneral Agreement .Thefrequent designation ofthose
provisions bythePanel interms ofitslegal conclusion inrespect ofArticle III:4, intheAppellate
Body 'sview, didnotserve thecause ofclarity inanalysis when itcame toevaluating thesame baseline
establishment rules under Article XX(g).
B. "relating totheconservation ofexhaustible natural resources"
ThePanel Report took theview thatclean airwasa"natural resource" thatcould be"depleted."
Accordingly, asalready noted earlier, thePanel concluded thatapolicy toreduce thedepletion ofclean
airwasapolicy toconserve anexhaustible natural resource within themeaning ofArticle XX(g).
Shortly thereafter, however, thePanel Report also concluded that "the less favourable baseline
establishments methods" were notprimarily aimed attheconservation ofexhaustible natural resources
andthus felloutside thejustifying scope ofArticle XX(g).
28Canada -Administration oftheForeign Investment Review Act,BISD 30S/140, adopted 7February 1984; United States -
Section 337oftheTariff Actof1930 ,BISD 36S/345, adopted 7November 1989; United States -Taxes onAutomobiles ,
DS31/R (1994), unadopted.
29Although, inearlier submissions totheAppellate Body, theUnited States suggested that "the Gasoline Rule" should
beexami nedinthecontextofArticleXX(g), initsPost-HearingMemor andum, dated1April1996, theUnitedStatesconfi rmed
itsunderstanding that the"measures" inissue arethebaseline establishment rules contained intheGasoline Rule.
Brazil stated, initsfinal submission totheAppellate Body, dated 1April 1996, that"the ‘measure ’with which thisappeal
isconcerned isthebaseline methodology oftheGasoline Rule, nottheentire rule itself." This would suggest aposition
similar tothatadopted bytheUnited States. Thereafter, Brazil continued tostate that"Brazil andVenezuela didnotchallenge
allportions oftheRule; they challenged only thediscriminatory methods ofestablishing baselines."
Venezuela stated, initssummary statement, dated 29March 1996, that"the measure tobeexamined isthediscriminatory
measure, thatis,theaspect oftheGasoline Rule thatdenies imported gasoline theright tousethesame regulatory system
ofbaselines applicable toU.S. gasoline, namely, thesystem ofindividual baselines."WT/DS2/AB/R
Page 15
ThePanel, addressing thetaskofinterpreting thewords "relating to",quoted with approval
thefollowing passage from thepanel report inthe1987 Herring andSalmon case:30
asthepreamble ofArticle XXindicates, thepurpose ofincluding Article XX:(g) in
theGeneral Agreement wasnottowiden thescope formeasures serving trade policy
purposes butmerely toensure thatthecommitments under theGeneral Agreement
donothinder thepursuit ofpolicies aimed attheconservation ofexhaustive natural
resources. ThePanel concluded forthese reasons that, while atrade measure didnot
have tobenecessary oressential totheconservation ofanexhaustible natural resource,
ithadtobeprimarily aimed attheconservation ofanexhaustible natural resource to
beconsidered as"relating to"conservation within themeaning ofArticle XX:(g).
(emphasis added bythePanel)
ThePanel Report thenwent ontoapply the1987 Herring andSalmon reasoning andconclusion
tothebaseline establishment rules oftheGasoline Rule inthefollowing manner:31
ThePanel thenconsidered whether theprecise aspects oftheGasoline Rule thatithad
found toviolate Article III--thelessfavourable baseline establishments methods that
adversely affected theconditions ofcompetition forimported gasoline --were primarily
aimed attheconservation ofnatural resources. ThePanel sawnodirect connection
between lessfavourable treatment ofimported gasoline thatwaschemically identical
todomestic gasoline, andtheUSobjective ofimproving airquality intheUnited States.
Indeed, intheview ofthePanel, being consistent with theobligation toprovide no
lessfavourable treatment would notprevent theattainment ofthedesired level of
conservation ofnatural resources under theGasoline Rule. Accordingly, itcould not
besaidthatthebaseline establishment methods thatafforded lessfavourable treatment
toimported gasoline were primarily aimed attheconservation ofnatural resources.
InthePanel 'sview, theabove-noted lackofconnection wasunderscored bythefact
thataffording treatment ofimported gasoline consistent withitsArticle III:4obligations
would notinanywayhinder theUnited States initspursuit ofitsconservation policies
under theGasoline Rule. Indeed, theUnited States remained freetoregulate inorder
toobtain whatever airquality itwished. ThePanel therefore concluded thattheless
favourable baseline establishments methods atissue inthiscase were notprimarily
aimed attheconservation ofnatural resources.
Itisnoteasy tofollow thereasoning intheabove paragraph ofthePanel Report. Inourview,
there isacertain amount ofopaqueness inthatreasoning. ThePanel starts with positing thatthere
was"nodirect connection "between thebaseline establishment rules which itcharacterized as"less
favourable treatment" ofimported gasoline thatwaschemically identical tothedomestic gasoline and
"the USobjective ofimproving airquality intheUnited States." Shortly thereafter, thePanel went
ontoconclude that"accordingly, itcould notbesaidthatthebaseline establishment rules thatafforded
30Canada-MeasuresAffectingExportsofUnprocessedHerringandSalmon,BISD35S/98,para.4.6;adopt edon22March
1988, cited inPanel Report, para. 6.39.
31Panel Report, para. 6.40.WT/DS2/AB/R
Page 16
lessfavourable treatment toimported gasoline were primarily aimed attheconservation ofnatural
resources" (emphasis added). ThePanel didnottrytoclarify whether thephrase "direct connection"
wasbeing used asasynonym for"primarily aimed at"orwhether anewandadditional element (on
topof"primarily aimed at")wasbeing demanded.
One problem with thereasoning inthatparagraph isthatthePanel asked itself whether the
"less favourable treatment" ofimported gasoline was"primarily aimed at"theconservation ofnatural
resources, rather than whether the"measure", i.e.thebaseline establishment rules, were "primarily
aimed at"conservation ofclean air. Inourview, thePanel here wasinerror inreferring toitslegal
conclusion onArticle III:4 instead ofthemeasure inissue. The result ofthisanalysis istoturn
Article XXonitshead. Obviously, there hadtobeafinding thatthemeasure provided "less favourable
treatment" under Article III:4 before thePanel examined the"General Exceptions" contained in
Article XX. That, however, isaconclusion oflaw. Thechapeau ofArticle XXmakes itclear that
itisthe"measures" which aretobeexamined under Article XX(g), andnotthelegal finding of"less
favourable treatment."
Furthermore, thePanel Report appears tohave utilized aconclusion ithadreached earlier in
holding thatthebaseline establishment rules didnotfallwithin thejustifying terms ofArticles XX(b);
i.e.thatthebaseline establishment rules were not"necessary" fortheprotection ofhuman, animal
orplant life. ThePanel Report, itwillberecalled, found thatthebaseline establishment rules had
notbeen shown bytheUnited States tobe"necessary" under Article XX(b) since alternative measures
either consistent orlessinconsistent withtheGeneral Agreement were reasonably available totheUnited
States forachieving itsaimofprotecting human, animal orplant life.32Inother words, thePanel Report
appears tohave applied the"necessary" testnotonly inexamining thebaseline establishment rules
under Article XX(b), butalsointhecourse ofapplying Article XX(g).
Aprincipal difficulty, intheview oftheAppellate Body, with thePanel Report 'sapplication
ofArticle XX(g) tothebaseline establishment rules isthatthePanel there overlooked afundamental
ruleoftreaty interpretation. This rulehasreceived itsmost authoritative andsuccinct expression in
theVienna Convention ontheLawofTreaties (the"Vienna Convention ")33which provides inrelevant
part:
32Panel Report, paras. 6.25-6.28.
33(1969), 8International Legal Materials 679.WT/DS2/AB/R
Page 17
ARTICLE 31
General ruleofinterpretation
1. Atreaty shall beinterpreted ingood faith inaccordance with
theordinary meaning tobegiven totheterms ofthetreaty intheir
context andinthelight ofitsobject andpurpose.
The"general ruleofinterpretation" setoutabove hasbeen relied upon byalloftheparticipants
andthird participants, although notalways inrelation tothesame issue. That general rule of
interpretation hasattained thestatus ofaruleofcustomary orgeneral international law.34Assuch,
itforms partofthe"customary rules ofinterpretation ofpublic international law" which theAppellate
Body hasbeen directed, byArticle 3(2)oftheDSU,toapply inseeking toclarify theprovisions of
theGeneral Agreement andtheother "covered agreements" oftheMarrakesh Agreement Establishing
theWorldTradeOrganization35(the"WTOAgreement").Thatdirectionreflectsameasureofrecognition
thattheGeneral Agreement isnottoberead inclinical isolation from public international law.
Applying thebasic principle ofinterpretation thatthewords ofatreaty, liketheGeneral
Agreement ,aretobegiven their ordinary meaning, intheir context andinthelight ofthetreaty 'sobject
andpurpose, theAppellate Body observes thatthePanel Report failed totakeadequate account ofthe
words actually used byArticle XXinitsseveral paragraphs. Inenumerating thevarious categories
ofgovernmental acts, laws orregulations which WTO Members maycarry outorpromulgate inpursuit
ofdiffering legitimate state policies orinterests outside therealm oftrade liberalization, Article XX
uses different terms inrespect ofdifferent categories:
"necessary" -inparagraphs (a),(b)and(d); "essential" -inparagraph (j);
"relating to"-inparagraphs (c),(e)and(g); "for theprotection of"-inparagraph (f);
"inpursuance of"-inparagraph (h); and "involving" -inparagraph (i).
34See, e.g.,Territorial Dispute Case (Libyan Arab Jamahiriya v.Chad) ,(1994), I.C.J. Reports p.6(International Court
ofJustice); Golder v.United Kingdom ,ECHR, Series A,(1995) no.18(European Court ofHuman Rights); Restrictions
totheDeath Penalty Cases ,(1986) 70International Law Reports 449 (Inter-American Court ofHuman Rights); Jiménez
deAréchaga, "International Law inthePast Third ofaCentury" (1978-I) 159 Recueil desCours 1,p.42; D.Carreau,
Droit International (3èed., 1991) p.140; Oppenheim 'sInternational Law (9th ed., Jennings andWatts, eds. 1992) Vol. 1,
pp.1271-1275.
35Done atMarrakesh, Morocco, 15April 1994.WT/DS2/AB/R
Page 18
Itdoes notseem reasonable tosuppose thattheWTO Members intended torequire, inrespect
ofeach andevery category, thesame kind ordegree ofconnection orrelationship between themeasure
under appraisal andthestate interest orpolicy sought tobepromoted orrealized.
Atthesame time, Article XX(g) anditsphrase, "relating totheconservation ofexhaustible
natural resources," need toberead incontext andinsuch amanner astogive effect tothepurposes
andobjects oftheGeneral Agreement .Thecontext ofArticle XX(g) includes theprovisions ofthe
restoftheGeneral Agreement ,including inparticular Articles I,IIIandXI;conversely, thecontext
ofArticles IandIIIandXIincludes Article XX. Accordingly, thephrase "relating totheconservation
ofexhaustible natural resources" may notberead soexpansively asseriously tosubvert thepurpose
andobject ofArticle III:4. NormayArticle III:4 begiven sobroad areach aseffectively toemasculate
Article XX(g) andthepolicies andinterests itembodies. Therelationship between theaffirmative
commitments setoutin,e.g.,Articles I,IIIandXI,andthepolicies andinterests embodied inthe
"General Exceptions" listed inArticle XX, canbegiven meaning within theframework oftheGeneral
Agreement anditsobject andpurpose byatreaty interpreter only onacase-to-case basis, bycareful
scrutiny ofthefactual andlegal context inagiven dispute, without disregarding thewords actually
used bytheWTO Members themselves toexpress their intent andpurpose.
The1987 Herring andSalmon report, andthePanel Report itself, gave some recognition to
theforegoing considerations ofprinciple. Asearlier noted, thePanel Report quoted thefollowing
excerpt from theHerring andSalmon report:
asthepreamble ofArticle XXindicates, thepurpose ofincluding Article XX(g) in
theGeneral Agreement wasnottowiden thescope formeasures serving trade policy
purposes butmerely toensure thatthecommitments under theGeneral Agreement do
nothinder thepursuit ofpolicies aimed attheconservation ofexhaustible natural
resources.36(emphasis added)
Alltheparticipants andthethird participants inthisappeal accept thepropriety andapplicability
oftheview oftheHerring andSalmon report andthePanel Report thatameasure must be"primarily
aimed at"theconservation ofexhaustible natural resources inorder tofallwithin thescope of
Article XX(g).37Accordingly, weseenoneed toexamine thispoint further, save, perhaps, tonote
36Canada -Measures Affecting Exports ofUnprocessed Herring andSalmon ,BISD 35S/98, para. 4.6; adopted 22March
1988, cited inPanel Report, para. 6.39.
37Wenote thatthesame interpretation hasbeen applied intworecent unadopted panel reports: United States -Restrictions
onImports ofTuna ,DS29/R (1994); United States -Taxes onAutomobiles ,DS31/R (1994).WT/DS2/AB/R
Page 19
thatthephrase "primarily aimed at"isnotitself treaty language andwasnotdesigned asasimple litmus
testforinclusion orexclusion from Article XX(g).
Against thisbackground, weturntothespecific question ofwhether thebaseline establishment
rules areappropriately regarded as"primarily aimed at"theconservation ofnatural resources forthe
purposes ofArticle XX(g). Weconsider thatthisquestion must beanswered intheaffirmative.
Thebaselineestablishmentrules,takenasawhole(thatis,theprovisionsrelatingtoestablishment
ofbaselines fordomestic refiners, along with theprovisions relating tobaselines forblenders and
importers ofgasoline), need toberelated tothe"non-degradation" requirements setoutelsewhere in
theGasoline Rule. Those provisions canscarcely beunderstood ifscrutinized strictly bythemselves,
totally divorced from other sections oftheGasoline Rule which certainly constitute partofthecontext
ofthese provisions. Thebaseline establishment rules whether individual orstatutory, were designed
topermit scrutiny andmonitoring ofthelevel ofcompliance ofrefiners, importers andblenders with
the"non-degradation"requirements.Withoutbaselinesofsomekind,suchscrutinywouldnotbepossible
andtheGasoline Rule'sobjective ofstabilizing andpreventing further deterioration ofthelevel of
airpollution prevailing in1990, would besubstantially frustrated. Therelationship between thebaseline
establishment rules andthe"non-degradation" requirements oftheGasoline Rule isnotnegated by
theinconsistency, found bythePanel, ofthebaseline establishment rules with theterms ofArticle III:4.
Weconsider that, given thatsubstantial relationship, thebaseline establishment rules cannot beregarded
asmerely incidentally orinadvertently aimed attheconservation ofclean airintheUnited States for
thepurposes ofArticle XX(g).
C. "ifsuch measures aremade effective inconjunction with restrictions ondomestic
production orconsumption"
ThePanel didnotfinditnecessary todealwith theissue ofwhether thebaseline establishment
rules "are made effective inconjunction with restrictions ondomestic production orconsumption",
since ithadearlier concluded thatthose rules hadnoteven satisfied thepreceding requirement of
"relating to"inthesense ofbeing "primarily aimed at"theconservation ofclean air. Having been
unable toconcur withthatearlier conclusion ofthePanel, wemust nowaddress thissecond requirement
ofArticle XX(g), theUnited States having, ineffect, appealed from thefailure ofthePanel toproceed
further with itsinquiry into theavailability ofArticle XX(g) asajustification forthebaseline
establishment rules.WT/DS2/AB/R
Page 20
TheclaimoftheUnitedStatesisthatthesecondclauseofArticleXX(g)requiresthattheburdens
entailed byregulating thelevel ofpollutants intheairemitted inthecourse ofcombustion ofgasoline,
must notbeimposed solely on,orinrespect of,imported gasoline.
Ontheother hand, Venezuela andBrazil refer toprior panel reports which include statements
totheeffect thattobedeemed as"made effective inconjunction withrestrictions ondomestic production
orconsumption", ameasure must be"primarily aimed at"making effective certain restrictions on
domestic production orconsumption.38Venezuela andBrazil alsoargue thattheUnited States has
failed toshow theexistence ofrestrictions ondomestic production orconsumption ofanatural resource
under theGasoline Rule since clean airwasnotanexhaustible natural resource within themeaning
ofArticle XX(g). Venezuela contends, finally, thattheUnited States hasnotdischarged itsburden
ofshowing thatthebaseline establishment rules make theUnited States 'regulatory scheme "effective."
TheclaimofVenezuelais,ineffect,thattobeproperlyregardedas"primarilyaimedat"theconservation
ofnatural resources, thebaseline establishment rules must notonly "reflect aconservation purpose"
butalsobeshown tohave had"some positive conservation effect."39
TheAppellate Body considers thatthebasic international lawruleoftreaty interpretation,
discussed earlier, thattheterms ofatreaty aretobegiven their ordinary meaning, incontext, soas
toeffectuate itsobject andpurpose, isapplicable here, too. Viewed inthislight, theordinary ornatural
meaning of"made effective" when used inconnection withameasure -agovernmental actorregulation -
maybeseentorefer tosuch measure being "operative", as"inforce", orashaving "come intoeffect."40
Similarly, thephrase "inconjunction with" may beread quite plainly as"together with" or"jointly
with."41Taken together, thesecond clause ofArticle XX(g) appears toustorefer togovernmental
measures likethebaseline establishment rules being promulgated orbrought intoeffect together with
restrictions ondomestic production orconsumption ofnatural resources. Putinaslightly different
manner, webelieve thattheclause "ifsuch measures aremade effective inconjunction with restrictions
ondomestic product orconsumption" isappropriately readasarequirement thatthemeasures concerned
impose restrictions, notjustinrespect ofimported gasoline butalsowith respect todomestic gasoline.
38Canada -Measures Affecting Exports ofUnprocessed Herring andSalmon ,BISD 35S/98, paras. 4.6-4.7; adopted
22March 1988. Also, United States -Restrictions onImports ofTuna ,DS29/R (1994), unadopted; andUnited States -
Taxes onAutomobiles ,DS31/R (1994), unadopted.
39Venezuela 'sAppellee 'sSubmission, dated 18March 1996; Venezuela 'sStatement attheOral Hearing, dated
27March 1996.
40The New Shorter Oxford English Dictionary onHistorical Principles (L.Brown, ed., 1993), Vol. I,p.786.
41Id., p.481.WT/DS2/AB/R
Page 21
The clause isarequirement ofeven-handedness intheimposition ofrestrictions, inthename of
conservation, upon theproduction orconsumption ofexhaustible natural resources.
There is,ofcourse, notextual basis forrequiring identical treatment ofdomestic andimported
products. Indeed, where there isidentity oftreatment -constituting real, notmerely formal, equality
oftreatment -itisdifficult toseehow inconsistency with Article III:4 would have arisen inthefirst
place. Ontheother hand, ifnorestrictions ondomestically-produced likeproducts areimposed at
all,andalllimitations areplaced upon imported products alone ,themeasure cannot beaccepted as
primarily oreven substantially designed forimplementing conservationist goals.42Themeasure would
simply benaked discrimination forprotecting locally-produced goods.
Inthepresentappeal,thebaselineestablishmentrulesaffectbothdomesticgasolineandimported
gasoline, providing for-generally speaking -individual baselines fordomestic refiners andblenders
andstatutory baselines forimporters. Thus, restrictions ontheconsumption ordepletion ofclean air
byregulating thedomestic production of"dirty" gasoline areestablished jointly with corresponding
restrictions with respect toimported gasoline. That imported gasoline hasbeen determined tohave
been accorded "less favourable treatment" than thedomestic gasoline interms ofArticle III:4, isnot
material forpurposes ofanalysis under Article XX(g). Itmight alsobenoted thatthesecond clause
ofArticle XX(g) speaks disjunctively of"domestic production orconsumption."
Wedonotbelieve, finally, thattheclause "ifmade effective inconjunction with restrictions
ondomestic production orconsumption" wasintended toestablish anempirical "effects test" forthe
availability oftheArticle XX(g) exception. Inthefirstplace, theproblem ofdetermining causation,
well-known inboth domestic andinternational law, isalways adifficult one. Inthesecond place,
inthefield ofconservation ofexhaustible natural resources, asubstantial period oftime, perhaps years,
may have toelapse before theeffects attributable toimplementation ofagiven measure may be
observable. Thelegal characterization ofsuch ameasure isnotreasonably made contingent upon
occurrence ofsubsequent events. Wearenot,however, suggesting thatconsideration ofthepredictable
effects ofameasure isnever relevant. Inaparticular case, should itbecome clear thatrealistically,
42Some illustration isoffered intheHerring andSalmon case which involved, inter alia,aCanadian prohibition ofexports
ofunprocessed herring andsalmon. This prohibition effectively constituted abanonpurchase ofcertain unprocessed fish
byforeign processors andconsumers while imposing nocorresponding banonpurchase ofunprocessed fish bydomestic
processors andconsumers. Theprohibitions appeared tobedesigned toprotect domestic processors bygiving them exclusive
access tofresh fishandatthesame time denying such raw material toforeign processors. The Panel concluded thatthese
export prohibitions were notjustified byArticle XX(g). BISD 35S/98, para. 5.1, adopted 22March 1988. Seealso the
Panel Report intheUnited States -Prohibition ofImports ofTuna andTuna Products from Canada ,BISD 29S/91, paras. 4.10-
4.12; adopted on22February 1982.WT/DS2/AB/R
Page 22
aspecific measure cannot inanypossible situation have anypositive effect onconservation goals, it
would very probably bebecause thatmeasure wasnotdesigned asaconservation regulation tobegin
with. Inother words, itwould nothave been "primarily aimed at"conservation ofnatural resources
atall.
IV. The Introductory Provisions ofArticle XXoftheGeneral Agreement: Applying the
Chapeau oftheGeneral Exceptions
Having concluded, inthepreceding section, thatthebaseline establishment rules oftheGasoline
Rule fallwithin theterms ofArticle XX(g), wecome tothequestion ofwhether those rules alsomeet
therequirements ofthechapeau ofArticle XX. Inorder thatthejustifying protection ofArticle XX
may beextended toit,themeasure atissue must notonly come under oneoranother oftheparticular
exceptions -paragraphs (a)to(j)-listed under Article XX; itmust alsosatisfy therequirements imposed
bytheopening clauses ofArticle XX. Theanalysis is,inother words, two-tiered: first, provisional
justification byreason ofcharacterization ofthemeasure under XX(g); second, further appraisal of
thesame measure under theintroductory clauses ofArticle XX.
Thechapeau byitsexpress terms addresses, notsomuch thequestioned measure oritsspecific
contents assuch, butrather themanner inwhich thatmeasure isapplied.43Itis,accordingly, important
tounderscore thatthepurpose andobject oftheintroductory clauses ofArticle XXisgenerally the
prevention of"abuse oftheexceptions of[what waslater tobecome] Article [XX]."44This insight
drawn from thedrafting history ofArticle XXisavaluable one. Thechapeau isanimated bythe
principle thatwhile theexceptions ofArticle XXmaybeinvoked asamatter oflegal right, theyshould
notbesoapplied astofrustrate ordefeat thelegal obligations oftheholder oftheright under the
substantive rules oftheGeneral Agreement .Ifthose exceptions arenottobeabused ormisused, in
other words, themeasures falling within theparticular exceptions must beapplied reasonably, with
dueregard both tothelegal duties oftheparty claiming theexception andthelegal rights oftheother
parties concerned.
Theburden ofdemonstrating thatameasure provisionally justified asbeing within oneofthe
exceptions setoutintheindividual paragraphs ofArticle XXdoes not,initsapplication, constitute
43This wasnoted inthePanel Report onUnited States -Imports ofCertain Automotive Spring Assemblies ,BISD 30S/107,
para. 56; adopted on26May 1983.
44EPCT/C.11/50, p.7;quoted inAnalytical Index: Guide toGATT Law and Practice, Volume I,p.564 (1995).WT/DS2/AB/R
Page 23
abuse ofsuch exception under thechapeau, rests ontheparty invoking theexception. That is,of
necessity, aheavier task than thatinvolved inshowing thatanexception, such asArticle XX(g),
encompasses themeasure atissue.
Theenterprise ofapplying Article XXwould clearly beanunprofitable oneifitinvolved no
more thanapplying thestandard used infinding thatthebaseline establishment rules were inconsistent
with Article III:4. That would alsobetrueifthefinding were oneofinconsistency with some other
substantive ruleoftheGeneral Agreement .Theprovisions ofthechapeau cannot logically refer to
thesame standard(s) bywhich aviolation ofasubstantive rulehasbeen determined tohave occurred.
Toproceed down thatpath would beboth toempty thechapeau ofitscontents andtodeprive the
exceptions inparagraphs (a)to(j)ofmeaning. Such recourse would alsoconfuse thequestion ofwhether
inconsistency with asubstantive ruleexisted, with thefurther andseparate question arising under the
chapeau ofArticle XXastowhether thatinconsistency wasnevertheless justified. Oneofthecorollaries
ofthe"general ruleofinterpretation" intheVienna Convention isthatinterpretation must givemeaning
andeffect toalltheterms ofatreaty. Aninterpreter isnotfreetoadopt areading thatwould result
inreducing whole clauses orparagraphs ofatreaty toredundancy orinutility.45
Thechapeau, itwillbeseen, prohibits such application ofameasure atissue (otherwise falling
within thescope ofArticle XX(g)) aswould constitute
(a) "arbitrary discrimination" (between countries where thesame conditions prevail);
(b) "unjustifiable discrimination" (with thesame qualifier); or
(c) "disguised restriction" oninternational trade.
Thetextofthechapeau isnotwithout ambiguity, including onerelating tothefield ofapplication
ofthestandards itscontains: thearbitrary orunjustifiable discrimination standards andthedisguised
restriction oninternational trade standard. Itmaybeasked whether these standards donothave different
fields ofapplication. Such aquestion wasputtotheUnited States inthecourse oftheoralhearing.
Itwasasked whether thewords incorporated intothefirst twostandards "between countries where
thesame conditions prevail" refer toconditions inimporting andexporting countries, oronly to
conditions inexporting countries. Thereply oftheUnited States wastotheeffect thatitinterpreted
45E.g., Corfu Channel Case (1949) I.C.J. Reports, p.24 (International Court ofJustice); Territorial Dispute Case (Libyan
Arab Jamahiriya v.Chad) (1994) I.C.J. Reports, p.23(International Court ofJustice); 1966 Yearbook oftheInternational
Law Commission, Vol. IIat219; Oppenheim 'sInternational Law (9th ed., Jennings andWatts eds., 1992), Volume 1,
1280-1281; P.Dallier andA.Pellet, Droit International Public, 5èed.(1994) para. 17.2); D.Carreau, Droit International,
(1994) para. 369.WT/DS2/AB/R
Page 24
thatphrase asreferring toboththeexporting countries andimporting countries andasbetween exporting
countries. Italsosaidthatthelanguage spoke foritself, butthere wasnoreference tothird parties;
while some thought thatthiswasonly between exporting countries inter se,there isnosupport inthe
textforthatview. Nosuch question wasputtotheUnited States concerning thefield ofapplication
ofthethird standard -disguised restriction oninternational trade. ButtheUnited States putforward
arguments designed toshow thatinthecaseunder appeal, ithadmetallthestandards setforth inthe
chapeau. Indoing so,itclearly proceeded ontheassumption that, whatever elsethey might relate
toinanother case, they were relevant toacase ofnational treatment where thePanel hadfound a
violation ofArticle III:4. Atnopoint intheappeal wasthatassumption challenged byVenezuela or
Brazil. Venezuela argued thattheUnited States hadfailed tomeet allthestandards contained inthe
chapeau. SodidNorway andtheEuropean Communities asthird participants. Inshort, thefield of
application ofthese standards wasnotatissue.
Theassumption onwhich alltheparticipants proceeded isbuttressed bythefactthatthechapeau
saysthat"nothing inthisAgreement shall beconstrued toprevent theadoption orenforcement byany
contracting party ofmeasures ..."Theexceptions listed inArticle XXthusrelate toalloftheobligations
undertheGeneralAgreement:thenationaltreatmentobligationandthemost-favoured-nationobligation,
ofcourse, butothers aswell. Effect ismore easily given tothewords "nothing inthisAgreement",
andArticle XXasawhole including itschapeau more easily integrated intotheremainder oftheGeneral
Agreement ,ifthechapeau istaken tomean thatthestandards itsetsforth areapplicable toallofthe
situations inwhich anallegation ofaviolation ofasubstantive obligation hasbeen made andoneof
theexceptions contained inArticle XXhasinturn been claimed.
Against thisbackground, weseenoneed todecide thematter ofthefield ofapplication of
thestandards setforth inthechapeau nortomake aruling atvariance with thecommon understanding
oftheparticipants.46
46Wenote inthisconnection that two previous panels hadoccasion toapply thechapeau. InUnited States -Imports
ofCertain Automotive Spring Assemblies ,BISD 30S/107; adopted on26May 1983, thepanel hadbefore itabanonimports,
andanexclusion order oftheUnited States 'International Trade Commission, ofcertain automotive spring assemblies which
theCommission hadfound, under Section 337oftheTariff Actof1930, tohave infringed valid United States patents. The
panel there held that theexclusion order had notbeen applied inamanner which would constitute ameans of"arbitrary
orunjustifiable discrimination against countries where thesame conditions prevail," because thatorder was directed against
imports ofinfringing assemblies "from allforeign sources, andnotjustfrom Canada." Atthesame time, thesame order
was also examined andfound nottobe"adisguised restriction oninternational trade." Id., paras. 54-56. Seealso United
States -Prohibition ofImports ofTuna andTuna Products ,BISD 29S/91, para. 4.8; adopted 22February 1982.
Itmay beobserved that theterm "countries" inthechapeau istextually unqualified; itdoes notsay"foreign
countries", asdidArticle 4ofthe1927 League ofNations International Convention fortheAbolition ofImport andExport
Prohibitions andRestrictions ,97L.N.T.S. 393. Neither does thechapeau say"third countries" asdid, e.g.,bilateral trade
(continued...)WT/DS2/AB/R
Page 25
"Arbitrary discrimination", "unjustifiable discrimination" and "disguised restriction" on
international trade may, accordingly, beread side-by-side; they impart meaning tooneanother. It
isclear tousthat"disguised restriction" includes disguised discrimination ininternational trade. It
isequally clear thatconcealed orunannounced restriction ordiscrimination ininternational trade does
notexhaust themeaning of"disguised restriction." Weconsider that"disguised restriction", whatever
elseitcovers, may properly beread asembracing restrictions amounting toarbitrary orunjustifiable
discrimination ininternational trade taken under theguise ofameasure formally within theterms of
anexception listed inArticle XX. Putinasomewhat different manner, thekinds ofconsiderations
pertinentindecidingwhethertheapplicationofaparticularmeasureamountsto"arbitraryorunjustifiable
discrimination", mayalsobetaken intoaccount indetermining thepresence ofa"disguised restriction"
oninternational trade. Thefundamental theme istobefound inthepurpose andobject ofavoiding
abuse orillegitimate useoftheexceptions tosubstantive rules available inArticle XX.
There was more than onealternative course ofaction available totheUnited States in
promulgating regulations implementing theCAA. These included theimposition ofstatutory baselines
without differentiation asbetween domestic andimported gasoline. This approach, ifproperly
implemented, could have avoided anydiscrimination atall.Among theother options open totheUnited
States wastomake available individual baselines toforeign refiners aswellasdomestic refiners. The
United States hasputforward aseries ofreasons why either ofthese courses wasnot,initsview,
realistically open toitandwhy, instead, ithadtodevise andapply thebaseline establishment rules
contained intheGasoline Rule.
Inexplaining whyindividual baselines forforeign refiners hadnotbeen putinplace, theUnited
States laidheavy stress upon thedifficulties which theEPA would have hadtoface. These difficulties
related toanticipated administrative problems thatindividual baselines forforeign refiners would have
generated. This argument wasmade succinctly bytheUnited States inthefollowing terms:
Verification onforeign soilofforeign baselines, andsubsequent enforcement actions,
present substantial difficulties relating toproblems arising whenever acountry exercises
enforcement jurisdiction over foreign persons. Inaddition, even ifindividual baselines
were established forseveral foreign refiners, theimporter would betempted toclaim
therefinery oforigin thatpresented themost benefits interms ofbaseline restrictions,
46(...continued)
agreements negotiated bytheUnited States under the1934 Reciprocal Trade Agreements Act;e.g.theTrade Agreement
between theUnited States ofAmerica andCanada ,15November 1935, 168 L.N.T.S. 356 (1936). These earlier treaties
arehere noted, notaspertaining tothetravaux preparatoires oftheGeneral Agreement ,butsimply toshow how incomparable
treaties, aparticular intent was expressed with words notfound inprinter 'sinkintheGeneral Agreement .WT/DS2/AB/R
Page 26
andtracking therefinery ororigin would bevery difficult because gasoline isafungible
commodity.TheUnitedStatesshouldnothavetoprovethatitcannotverifyinformation
andenforce itsregulations inevery instance inorder toshow thatthesame enforcement
conditions donotprevail intheUnited States andother countries ...Theimpracticability
ofverification andenforcement offoreign refiner baselines inthisinstance shows that
the"discrimination" isbased onserious, notarbitrary orunjustifiable, concerns
stemming from different conditions between enforcement ofitslaws intheUnited States
andabroad.47
Thus, according totheUnited States, imported gasoline wasrelegated tothemore exacting
statutory baseline requirement because ofthese difficulties ofverification andenforcement. TheUnited
States stated thatverification andenforcement oftheGasoline Rule'srequirements forimported gasoline
are"much easier when thestatutory baseline isused" andthatthere would bea"dramatic difference"
intheburden ofadministering requirements forimported gasoline ifindividual baselines were allowed.48
Whiletheanticipateddifficultiesconcerningverificationandsubsequentenforcementaredoubtless
realtosome degree, thePanel viewed them asinsufficient tojustify thedenial toforeign refiners of
individual baselines permitted todomestic refiners. ThePanel said:
While thePanel agreed thatitwould benecessary under such asystem toascertain
theorigin ofgasoline, thePanel could notconclude thattheUnited States hadshown
thatthiscould notbeachieved byother measures reasonably available toitand
consistent orlessinconsistent with theGeneral Agreement. Indeed, thePanel noted
thatadetermination oforigin would often befeasible. The Panel examined, for
instance, thecase ofadirect shipment totheUnited States. Itconsidered thatthere
wasnoreason tobelieve that, given theusual measures available ininternational trade
fordetermination oforigin andtracking ofgoods (including documentary evidence
andthird party verification) there wasanyparticular difficulty sufficient towarrant
thedemands ofthebaseline establishment methods applied bytheUnited States.49
...
Intheview ofthePanel, theUnited States hadreasonably available toitdatafor,and
measures of,verification andassessment which were consistent orlessinconsistent
with Article III:4. Forinstance, although foreign datamay beformally lesssubject
tocomplete control byUSauthorities, thisdidnotamount toestablishing thatforeign
data could notinanycircumstances besufficiently reliable toserve U.S. purposes.
This, however, wasthepractical effect oftheapplication oftheGasoline Rule. In
thePanel'sview,theUnitedStateshadnotdemonstratedthatdataavailablefromforeign
refiners was inherently less susceptible toestablished techniques ofchecking,
verification, assessment andenforcement than data forother trade ingoods subject
47Para. 55oftheAppellant 'sSubmission, dated 4March 1996. The United States was ineffect making thesame point
when, atpages 11and12ofitsPost-Hearing Memorandum, itargued thattheconditions were notthesame asbetween the
United States, ontheone hand, and Venezuela and Brazil ontheother.
48Supplementary responses bytheUnited States tocertain questions oftheAppellate Body, dated 1April 1996.
49Panel Report, para. 6.26.WT/DS2/AB/R
Page 27
toUSregulation. Thenature ofthedatainthiscase wassimilar todatarelied upon
bytheUnited States inother contexts, including, forexample, under theapplication
ofantidumping laws. Inanantidumping case, only when theinformation wasnot
supplied ordeemed unverifiable didtheUnited States turn toother information. If
asimilar practice were tobeapplied inthecase oftheGasoline Rule, then importers
could, forinstance, bepermitted tousetheindividual baselines offoreign refiners for
imported gasoline from those refiners, with thestatutory baseline being applied only
when thesource ofimported gasoline could notbedetermined orabaseline could not
beestablished because ofanabsence ofdata.50
Weagree with thefinding above made inthePanel Report. There are,asthePanel Report
found, established techniques forchecking, verification, assessment andenforcement ofdatarelating
toimported goods, techniques which inmany contexts areaccepted asadequate topermit international
trade -trade between territorial sovereigns -togoonandgrow. TheUnited States must have been
aware thatforthese established techniques andprocedures towork, cooperative arrangements with
bothforeignrefinersandtheforeigngovernmentsconcernedwouldhavebeennecessaryandappropriate.
Attheoralhearing, inthecourse ofresponding toanenquiry astowhether theEPA could have adapted,
forpurposes ofestablishing individual refinery baselines forforeign refiners, procedures forverification
ofinformation found inU.S. antidumping laws, theUnited States saidthat"intheabsence ofrefinery
cooperation andthepossible absence offoreign government cooperation aswell", itwasunlikely that
theEPA auditors would beabletoconduct theon-site audit reviews necessary toestablish even the
overall quality ofrefineries '1990 gasoline.51From thisstatement, there arises astrong implication,
itappears totheAppellate Body, thattheUnited States hadnotpursued thepossibility ofentering into
cooperative arrangements with thegovernments ofVenezuela andBrazil or,ifithad, nottothepoint
where itencountered governments thatwere unwilling tocooperate. Therecord ofthiscase setsout
thedetailed justifications putforward bytheUnited States. Butitdoes notreveal what, ifany, efforts
hadbeen taken bytheUnited States toenter into appropriate procedures incooperation with the
governments ofVenezuela andBrazil soastomitigate theadministrative problems pleaded bytheUnited
States.52ThefactthattheUnited States Congress might have intervened, asitdidlater intervene, in
50Panel Report, para. 6.28.
51Supplementary responses totheUnited States tocertain questions oftheAppellate Body, dated 1April 1996.
52While itisnotfortheAppellate Body tospeculate where thelimits ofeffective international cooperation aretobefound,
reference may bemade toanumber ofprecedents that theUnited States (and other countries) have considered itprudent
tousetohelp overcome problems confronting enforcement agencies byvirtue ofthefactthattherelevant lawandtheauthority
oftheenforcement oftheagency does nothold sway beyond national borders. During thecourse oftheoralhearing, attention
was drawn tothefactthatinaddition totheantidumping lawreferred tobythePanel inthepassage cited above, there were
other USregulatory laws ofthiskind, e.g.,inthefield ofanti-trust law, securities exchange lawandtaxlaw. There are
cooperative agreements entered intobytheUSandother governments tohelp enforce regulatory laws ofthekind mentioned
andtoobtain data from abroad. There aresuch agreements, inter alia,intheanti-trust andtaxareas. There arealso, within
theframework oftheWTO, theAgreement ontheImplementation ofArticle VIofGATT 1994 ,(the"Antidumping Agreement "),
theAgreementonSubsidiesandCountervailingMeasures(the"SCMAgreement")andtheAgreementonPre-ShipmentInspection,
allofwhich constitute recognition ofthefrequency and significance ofinternational cooperation ofthissort.WT/DS2/AB/R
Page 28
theprocess bydenying funding, isbeside thepoint: theUnited States, ofcourse, carries responsibility
foractions ofboth theexecutive andlegislative departments ofgovernment.
Initssubmissions, theUnited States alsoexplained why thestatutory baseline requirement
wasnotimposed ondomestic refiners aswell. Here, theUnited States stressed theproblems that
domestic refineries would have faced hadthey been required tocomply with thestatutory baseline.
ThePanel Report summarized theUnited States 'argument inthefollowing terms:
TheUnitedStatesconcludedthat,contrarytoVenezuela'sandBrazil'sclaim,ArticleXX
didnotrequire adoption ofthestatutory baseline asanational standard even ifthe
difficulties associated withtheestablishment ofindividual baselines forimporters were
insurmountable. Application ofthestatutory baseline todomestic producers of
reformulated andconventional gasoline in1995 would have been physically and
financially impossible because ofthemagnitude ofthechanges required inalmost all
USrefineries; itthus would have caused asubstantial delay intheprogramme.
Weighing thefeasibility ofpolicy options ineconomic ortechnical terms inorder to
meet anenvironmental objective wasalegitimate consideration, anddidnot,initself,
constituteprotectionism,asallegedbyVenezuelaandBrazil.ArticleXXdidnotrequire
agovernment tochoose themost expensive possible waytoregulate itsenvironment.53
(emphasis added)
Clearly, theUnited States didnotfeelitfeasible torequire itsdomestic refiners toincur the
physical andfinancial costs andburdens entailed byimmediate compliance with astatutory baseline.
TheUnited States wished togive domestic refiners time torestructure their operations andadjust to
therequirements intheGasoline Rule. This may very well have constituted sound domestic policy
from theviewpoint oftheEPA andU.S. refiners. Atthesame time wearebound tonote that, while
theUnited States counted thecosts foritsdomestic refiners ofstatutory baselines, there isnothing
intherecord toindicate thatitdidother thandisregard thatkindofconsideration when itcame toforeign
refiners.
Wehave above located twoomissions onthepartoftheUnited States: toexplore adequately
means, including inparticular cooperation with thegovernments ofVenezuela andBrazil, ofmitigating
theadministrativeproblemsreliedonasjustificationbytheUnitedStatesforrejectingindividualbaselines
forforeign refiners; andtocount thecosts forforeign refiners thatwould result from theimposition
ofstatutory baselines. Inourview, these twoomissions gowell beyond what wasnecessary forthe
Panel todetermine thataviolation ofArticle III:4 hadoccurred inthefirst place. The resulting
discrimination must have been foreseen, andwasnotmerely inadvertent orunavoidable. Inthelight
53Panel Report, para. 3.52.WT/DS2/AB/R
Page 29
oftheforegoing, ourconclusion isthatthebaseline establishment rules intheGasoline Rule, intheir
application, constitute "unjustifiable discrimination" anda"disguised restriction oninternational trade."
Wehold, insum, thatthebaseline establishment rules, although within theterms ofArticle XX(g),
arenotentitled tothejustifying protection afforded byArticle XXasawhole.
V. FINDINGS AND CONCLUSIONS
Forthereasons setoutinthepreceding sections ofthisreport, theAppellate Body hasreached
thefollowing conclusions:
(a) thePanel erred inlawinitsconclusion thatthebaseline establishment rules contained
inPart80ofTitle 40oftheCode ofFederal Regulations didnotfallwithin theterms
ofArticle XX(g) oftheGeneral Agreement ;
(b) thePanel accordingly also erred inlawinfailing todecide whether thebaseline
establishment rules contained inPart80ofTitle 40oftheCode ofFederal Regulations
fellwithin theambit ofthechapeau ofArticle XXoftheGeneral Agreement ;
(c) thebaseline establishment rules contained inPart80ofTitle 40oftheCode ofFederal
Regulations failtomeet therequirements ofthechapeau ofArticle XXoftheGeneral
Agreement ,and accordingly arenotjustified under Article XX oftheGeneral
Agreement.
Theforegoing legal conclusions modify theconclusions ofthePanel assetoutinparagraph 8.1
ofitsReport. TheAppellate Body 'sconclusions leave intact theconclusions ofthePanel thatwere
notthesubject ofappeal.
TheAppellate Body recommends thattheDispute Settlement Body request theUnited States
tobring thebaseline establishment rules contained inPart 80ofTitle 40oftheCode ofFederal
Regulations intoconformity with itsobligations under theGeneral Agreement .
Itisofsome importance thattheAppellate Body point outwhat thisdoes notmean. Itdoes
notmean, orimply, thattheability ofanyWTO Member totake measures tocontrol airpollution
or,more generally, toprotect theenvironment, isatissue. That would betoignore thefactthatWT/DS2/AB/R
Page 30
Article XXoftheGeneral Agreement contains provisions designed topermit important state interests -
including theprotection ofhuman health, aswellastheconservation ofexhaustible natural resources -
tofindexpression. Theprovisions ofArticle XXwere notchanged asaresult oftheUruguay Round
ofMultilateral Trade Negotiations. Indeed, inthepreamble totheWTO Agreement andintheDecision
onTrade andEnvironment ,54there isspecific acknowledgement tobefound about theimportance of
coordinating policies ontrade andtheenvironment. WTO Members have alarge measure ofautonomy
todetermine their own policies ontheenvironment (including itsrelationship with trade), their
environmental objectives andtheenvironmental legislation theyenact andimplement. Sofarasconcerns
theWTO, thatautonomy iscircumscribed only bytheneed torespect therequirements oftheGeneral
Agreement andtheother covered agreements.
Signed intheoriginal atGeneva this22nd dayofApril 1996 by:
___________________________
Florentino P.Feliciano
Presiding Member
___________________________ _______________________________
Christopher Beeby Mitsuo Matsushita
Member Member
54Adopted byMinisters attheMeeting oftheTrade Negotiations Committee inMarrakesh on14April 1994.RESTRICTED
WORLD TRADE WT/DS2/R
29January 1996
ORGANIZATION(96-0326)
United States -
Standards forReformulated
and Conventional Gasoline
Report ofthePanelTable ofContents
I. INTRODUCTION ....................................1
II. FACTUAL ASPECTS ....................................2
A. The Clean AirAct..................................3
B. EPA 'sGasoline Rule ................................3
1. Establishment ofBaselines ........................3
2. Reformulated Gasoline ..........................4
3. Conventional Gasoline (or"Anti-Dumping Rules") ........4
C. The May 1994 Proposal ..............................5
III. MAIN ARGUMENTS ....................................5
A. General ....................................5
B. The General 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 with restrictions
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 Rule isaTechnical
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. The European 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 goal ofprotecting human, animal orplant lifeorhealth 38
2. Necessity oftheinconsistent measure .................39
E. Article XX(d) ....................................42
1. Securing compliance with consistent laws orregulations .....43
2. Other conditions ..............................43
F. Article XX(g) ....................................43
1. Policy goal ofconserving anexhaustible natural resource ....44iii
2. Measure "related to"theconservation ofanexhaustible natural
resource; andmade effective "inconjunction" with restrictions
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 14.1 oftheAgreement onTechnical Barriers toTrade ("TBT Agreement")
andArticle 4oftheUnderstanding onRules andProcedures Governing theSettlement ofDisputes
("DSU"), ontheruleissued bytheEnvironmental Protection Agency on15December 1993,
entitled "Regulation ofFuels andFuel Additives -Standards forReformulated andConventional
Gasoline" (WT/DS2/1). Theconsultations between Venezuela andtheUnited States took place on
24February 1995. Asthey didnotresult 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, theDSB established apanel inaccordance with the
request made byVenezuela. On28April 1995, theparties tothedispute agreed thatthePanel
should have standard terms ofreference (DSU, Art. 7)andagreed onthecomposition ofthePanel
asfollows:
Chairman: Mr.Joseph Wong
Members: Mr.Crawford Falconer
Mr.Kim Luotonen
1.2 On10April 1995, Brazil requested theUnited States tohold consultations under
Article XXII:1 oftheGeneral Agreement, Article 14.1 oftheTBT Agreement andArticle 4ofthe
DSU ontheruleissued bytheEnvironmental Protection Agency on15December 1993 entitled
"Regulation onFuels andFuel Additives -Standards forReformulated andConventional
Gasoline" (WT/DS4/1). Consultations between Brazil andtheUnited States were held on
1May 1995 without resulting inasatisfactory solution ofthematter. Inacommunication dated
19May 1995, Brazil requested theDSB toestablish apanel toexamine thematter pursuant to
Article XXIII oftheGeneral Agreement, Article 14oftheAgreement onTechnical Barriers to
Trade andArticle 6oftheDSU. On31May 1995, theDSB established aPanel inaccordance
with therequest made byBrazil.
1.3 On31May 1995, pursuant toArticle 9oftheDSU inrespect ofmultiple complainants,
theDSB decided, with theagreement ofalltheparties, thatforpractical reasons thismatter be
examined bythePanel already established attherequest ofVenezuela on10April 1995. The
date oftheconstitution ofthePanel, namely 28April 1995, remained unchanged.
1.4 Due totheadditional taskgiven tothePanel, theDSB agreed upon, atthesame meeting,
thefollowing terms ofreference:
"Toexamine, inthelight oftherelevant provisions ofthecovered agreements cited by
Venezuela indocument WT/DS2/2 andbyBrazil indocument WT/DS4/2, thematters
referred totheDSB byVenezuela andBrazil inthose documents andtomake such
findings aswillassist theDSB inmaking therecommendations oringiving therulings
provided forinthose agreements".
1.5 TheChairman oftheDSB recalled Article 9.2oftheDSU which provides that"the rights
which theparties tothedispute would have enjoyed hadseparate panels examined thecomplaints
areinnoway impaired".
1.6 Australia, Canada, theEuropean Communities andNorway reserved their rights to
participate inthePanel proceedings asthird parties. Only theEuropean Communities and
Norway presented arguments tothePanel.WT/DS2/R
Page 2
1.7 ThePanel metwith theparties tothedispute from 10to12July 1995 andfrom 13to
15September 1995. Itmetwith theinterested third parties on11July 1995.
1.8 On21September 1995, theChairman ofthePanel informed theDSB thatthePanel would
notbeable toissue 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 15.2 oftheDSU, thePanel held afurther
meeting with theparties on3January 1996.
1.10 ThePanel issued itsfinal report totheparties tothedispute on17January 1996.
II. FACTUAL ASPECTS
A. The Clean AirAct
2.1 TheClean AirAct("CAA"), originally enacted in1963, aims atpreventing and
controlling airpollution intheUnited States. Ina1990 amendment totheCAA1,Congress
directed theEnvironmental Protection Agency ("EPA") topromulgate new regulations onthe
composition andemissions effects ofgasoline inorder toimprove airquality inthemost polluted
areas ofthecountry byreducing vehicle emissions oftoxic airpollutants andozone-forming
volatile organic compounds. These new regulations apply toUSrefiners, blenders andimporters.
2.2 Section 211(k) oftheCAA divides themarket forsaleofgasoline intheUnited States into
twoparts. Thefirst part, which covers approximately 30percent ofgasoline marketed inthe
United States, consists ofthenine large metropolitan areas thatexperienced theworst summertime
ozone pollution during theperiod 1987-1989, plus anyareas thatdonotmeet national ozone
requirements andareadded attherequest ofthegovernor ofthestate. These areas arereferred to
asozone "nonattainment areas", andinthispartoftheUnited States only "reformulated gasoline"
may besold toconsumers. IntherestoftheUnited States, "conventional gasoline" may besold
toconsumers.
2.3 Section 211(k)(2)-(3) oftheCAA established certain compositional andperformance
specifications forreformulated gasoline. Theoxygen content must notbelessthan 2.0percent by
weight, thebenzene content must notexceed 1.0percent byvolume andthegasoline must befree
ofheavy metals, including lead ormanganese. Theperformance specifications oftheCAA
require a15percent reduction intheemissions ofboth volatile organic compounds ("VOCs") and
toxic airpollutants ("toxics") andnoincrease inemissions ofnitrogen oxides ("NOx"). These
requirements aremeasured bycomparing theperformance ofreformulated gasoline inbaseline
vehicles (representative model year 1990 vehicles) against theperformance of"baseline gasoline"
insuch vehicles. Section 211(k)(10) oftheCAA defines thespecifications ofbaseline gasoline
sold inthesummer, which isthehigh ozone season, andleaves thespecifications ofwinter
baseline gasoline tobedetermined byEPA. Itprovides, however, thatthespecifications for
winter gasoline shall bethose oftheindustry average gasoline sold in1990. Fortheyear 2000
andbeyond, theCAA requires thatnew reformulated 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
Page 3
2.4 TheCAA alsosetsrequirements forconventional gasoline, which ensure thateach
refiner 's,blender 'sorimporter 'sconventional gasoline sold intherestofthecountry remains as
clean asitwasin1990. This programme 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 may sellconventional gasoline thatemits VOCs, toxics, NOx orcarbon
monoxide ("pollutants") ingreater amounts than thegasoline sold intheUnited States bythat
refiner, blender orimporter in1990. Inorder toimplement thisprovision, separate individual
baselines must beestablished forrefiners, blenders orimporters based onthegasoline they sold in
1990. That permits determination ofwhether theemissions from arefiner 's,blender 'sand
importer 'sconventional gasoline (post-1994 gasoline) aregreater than theemissions from its1990
gasoline. If,however, EPA determines that noadequate andreliable data exist regarding the
composition ofsuch 1990 gasoline sold byarefiner, 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 EPA todetermine thequality of1990 gasoline, towhich reformulated
andconventional gasoline would becompared inthefuture: these determinations areknown as
"baselines". EPA sethistoric baselines forindividual entities, andestablished astatutory baseline,
intended toreflect average US1990 gasoline quality, which would beused instead ofthehistoric
individual baselines forthose entities who were determined tobelacking adequate andreliable
data regarding thequality ofthegasoline they produced in1990.
2.6 EPA'sfinal rule2("Gasoline Rule") requires anydomestic refiner, which wasinoperation
foratleast 6months 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 data andvolume records ofits1990 gasoline. However, as
acknowledged byEPA atthetime, itwasnotanticipated thatmany domestic refiners would have
allthedata necessary toestablish anindividual baseline based entirely onactual 1990 data. If
Method 1type data arenotavailable, adomestic refiner must useits1990 gasoline blendstock
quality data and1990 blendstock production records (Method 2).Intheevent thatneither oneof
these twomethods isavailable, adomestic refiner must turn toMethod 3type data which consist
ofitspost-1990 gasoline blendstock and/or gasoline quality data modeled inlight ofrefinery
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 atleast 75percent, 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
Page 4
2.8 Certain entities are,however, automatically assigned tothestatutory baseline. Firstly,
refineries which began operation after 1990 orwere inoperation forlessthan 6months in1990
arerequired tousethestatutory baseline. Secondly, importers andblenders areassigned the
statutory baseline unless they canestablish their individual baseline following Method 1.Ifactual
1990 data arenotavailable, which is,asfordomestic refiners, anticipated byEPA, importers and
blenders areassigned tothestatutory baseline. EPA considers thatblenders which produce
gasoline bycombining gasoline blendstocks purchased from many sources cannot determine with
accuracy thequality oftheir 1990 gasoline using Methods 2and3.Similarly, EPA considers that
importers cannot useMethods 2and3,because these methods inherently apply only torefineries
andbecause oftheextreme difficulty inestablishing theconsistency oftheir gasoline quality over
time.
2. Reformulated Gasoline
2.9 Regarding theimplementation oftheregulations forreformulated gasoline, EPA proposes
atwo-step approach. From 1January 1995 to1January 1998, EPA enforces aninterim
programme called the"Simple Model". Under thisprogramme, reformulated gasoline sold inthe
United States bydomestic refiners willbesubject torequirements established with reference tothe
individual baseline forcertain gasoline qualities andrequirements specified intheGasoline Rule
forother gasoline qualities. More specifically, theparameters sulphur, olefins andT-90 are
measured against each USrefiner 'sindividual 1990 baseline andmust bemaintained atorbelow
these 1990 levels (these arecalled "non-degradation requirements"). Therequirements regarding
four other gasoline qualities (Reid Vapour Pressure, oxygen, benzene andtoxics performance) are
specified byEPA intheGasoline Rule4.Importers offoreign gasoline alsohave tocomply with
therequirements setoutinthefinal ruleregarding Reid Vapour Pressure, oxygen, benzene and
toxics performance. However, importers cannot useindividual 1990 baseline forsulphur, olefins
andT-90, buthave tocomply with levels specified inthestatutory baseline forthese parameters.
Under theSimple Model, requirements forsulphur, olefins andT-90 must bemetonanannual
average basis. EPA adopted theindividual baseline approach forthese parameters intheSimple
Model because atthetime itwasformulating itsregulation, itconsidered thattheavailable data
regarding sulphur, olefins andT-90 didnotpermit anassessment oftheprecise effects ofthese
components ontheemissions level ofgasoline. Given thisuncertainty, EPA didnotwant to
require refiners immediately tomake refinery changes which might later prove tobeunnecessary,
given thegreater flexibility provided bytheComplex Model.
2.10 Asof1January 1998, EPA willenforce 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, each refiner 's,
blender 'sorimporter 'sconventional gasoline sold intheUnited States benomore polluting than
thegasoline sold bythatrefiner, blender orimporter in19905.EPA requires domestic refiners to
measure non-degradation requirements forconventional gasoline against their individual baselines
while importers offoreign gasoline areassigned tothestatutory baseline. However, inthis
programme, thenon-degradation requirements apply toallconventional gasoline requirements,
andnotonly tosulphur, olefins andT-90. Requirements must bemetonanaverage annual basis.
440CFR 80.41.
542U.S.C. §7545 (CAA 211(k)(8)).WT/DS2/R
Page 5
TheGasoline Rule limits ("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 after theentry intoforce oftheComplex Model
in1998.
C. The May 1994 Proposal
2.13 Inview ofthecomments made byinterested parties during therulemaking process ofthe
final Gasoline Rule, EPA proposed, inMay 1994, 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 with respect 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 oftheMay 1994 Proposal.
III. MAIN ARGUMENTS
A. General
3.1 Venezuela andBrazil requested thePanel tofindthatthefinal rulepromulgated bythe
United States 'Environmental Protection Agency ("EPA") on15December 1993 andentitled
"Fuels andFuel Additives -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 Rule nullified 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
take allnecessary steps tobring theGasoline Rule intoconformity with itsobligations under the
General Agreement andtheTBT Agreement. Venezuela requested thePanel torecommend that
theUnited States amend theGasoline Rule toprovide treatment forgasoline imports noless
favourable than thataccorded toUSproduced gasoline.
3.4 TheUnited States requested thePanel tofindthattheGasoline Rule was:
640CFR 80(59Fed. Reg. 22800, 3May 1994).WT/DS2/R
Page 6
(a) consistent with Articles IandIIIoftheGeneral Agreement 1994;
(b) falling within thescope ofArticle XX(b),(d),and(g)ofGATT 1994;
(c) consistent with theAgreement onTechnical Barriers toTrade.
B. The General 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 third countries inviolation ofArticle IoftheGeneral
Agreement.
3.6 Venezuela argued thatthe75%ruleapplied only toafixed, finite andeasily determinable
group ofcountries, determined only byhistorical facts. Hence, noimporter orforeign refiner
could take anyaction thatwould alter itsability tobenefit from thisrule. According to
information submitted toVenezuela bytheUnited States, refineries based inCanada only were
likely tomeet thecriteria. Aprevious panel report hadfound thattheEuropean Community 's
meat quality regulations requiring certification ofimported beef bytheUSDepartment of
Agriculture were inconsistent with Article IoftheGeneral Agreement because "[E]xports oflike
products ofother origin than thatoftheUnited States were ineffect denied access totheEEC
market considering thattheonly certifying agency authorized tocertify themeat ...wasaUnited
States agency mandated tocertify only meat from theUnited States"7.Asamatter offact, only
certain countries could benefit from thisprovision. This was, 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 buthadbeen chosen soastosuitaparticular
category ofcountries andtherefore constituted an"advantage" within themeaning ofArticle I.
These criteria hadnolinkwith thecharacteristics ofgasoline asaproduct. Thus, the75%rule
applied adifferent andmore favourable standard toimports from some foreign refineries than it
applied toimports from refineries inother countries.
3.8 TheUnited States replied thatthe75%ruledidnotprovide an"advantage" tothe
products ofanyparticular country. The75%rulewould have applied toanyimporter thatcould
meet itstwoobjective 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 than 30%oftheir
gasoline). Secondly, thecriterion requiring thattheimporter andforeign refiner bethesame entity
eliminated theenforcement concerns arising inrelation with theestablishment ofanindividual
baseline foraforeign refiner. TheUnited States considered thatVenezuela 'sinvocation ofthe
panel report "European Economic Community -Imports ofBeef From Canada" wasinapposite
because, inthatdispute, theECregulation atissue expressly listed theUSDepartment of
Agriculture (USDA) astheonly certifying authority forthemeat inquestion, andUSDA wasonly
authorized tocertify USmeat. Inthatcase, thecertifying process itself guaranteed thatonly US
beef would becertified, thereby expressly favouring USbeef over thatofallother countries. In
contrast, the75%ruleexpressly requires anyimporter thatmeets itsobjective criteria toestablish
7"European Economic Community -Imports ofBeef From Canada", BISD 28S/92 (adopted on10March 1981), paragraph 4.2(a).WT/DS2/R
Page 7
anindividual baseline foritsgasoline. TheUnited States alsonoted thattheregulatory deadline
forindividual baseline applications under the75%rulehadelapsed without anycompany meeting
thecriteria. The75%rulehadnoapplication andcould therefore notbeinconsistent with any
provisions oftheGeneral Agreement.
3.9 Venezuela considered thattheUnited States interpreted toonarrowly thepanel report
"EEC -Imports ofBeef From Canada" when saying thatthefavoured country must beexpressly
identified inorder fortheregulation toviolate Article I.Aruleviolated Article Iwhen it
stipulated, likethe75%rule, thattheproducts ofonly some countries could qualify.
3.10 Venezuela andBrazil considered thatthefactthatthe75%rulehadnoapplication should
notprevent thePanel from ruling onit.Venezuela considered thatthemere existence ofsuch a
regulation might have inhibiting 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 atfirst sight, were infactdesigned tofitonly the
precise situation oftheir own multinationals, thus threatening theintegrity ofArticle I.
2. Article III-National Treatment onInternal Taxation andRegulation
a) Article III:4
3.11 Venezuela andBrazil stressed thatthey were notquestioning theright oftheUnited States
toenact stringent environmental standards andregulations inorder toimprove airquality within
theUSterritory provided these standards andregulations treated imported products noless
favourably than domestic likeproducts.
3.12 Venezuela andBrazil argued thattheGasoline Rule, bydenying foreign refiners the
possibility toestablish anindividual baseline, violated Article III:4 because itaccorded less
favourable treatment toimported gasoline, both reformulated andconventional, than toUS
gasoline. TheGasoline Rule required imported gasoline toconform with themore stringent
statutory baseline when USgasoline hadtocomply only with aUSrefiner 'sindividual baseline.
Practically, thismeant thatimported gasoline with certain parameter levels above thestatutory
baseline could notbedirectly sold intheUSmarket whereas gasoline with these same qualities
produced inaUSrefinery could befreely sold ontheUSmarket provided thatitconformed with
thatrefiner 'sindividual baseline. Inorder toaccommodate thissituation, foreign refiners hadtwo
options: (i)make expensive investments andchanges totheir refineries inorder toproduce
gasoline conforming tothemore stringent statutory baseline, or(ii)supply atalower price
gasoline toanimporter thatcould average thatgasoline with other gasolines (ifsuch other
gasolines exist insufficient amount) inorder tomeet, over anannual period, therequirements of
thestatutory baseline. Both options adversely affected theconditions ofcompetition forimported
gasoline andafforded protection todomestic production inamanner contrary toArticle III.
Furthermore, these adverse competitive effects were precisely what EPA intended toavoid forUS
refiners bygranting them individual baselines. Brazil added thatitwasuptotheUnited States to
demonstrate thatitsdiscriminatory system didnottreat imports lessfavourably.
3.13 Venezuela andBrazil held thatofficials from theUSgovernment hadacknowledged on
various occasions thattheGasoline Rule discriminated against imported gasoline andaccorded
more favourable treatment todomestically produced gasoline. Venezuela added thatanother US
government official hadpublicly stated thatsuch discrimination wasintentionally endorsed asa
means ofaffording protection toUSgasoline. These statements showed thattheGasoline Rule
discriminated both ineffect andinintent against foreign refiners. Venezuela andBrazil furtherWT/DS2/R
Page 8
argued thatEPA's1994 proposed amendments totheGasoline Rule ("1994 Proposal")
acknowledged thatthediscriminatory treatment ofimported gasoline wasinconsistent with the
United States 'obligations under theGeneral Agreement. Venezuela andBrazil argued thatthe
1994 Proposal would have partly eliminated thediscrimination byproviding fortheestablishment
ofindividual baselines byforeign refiners ofreformulated gasoline; however, thediscriminatory
treatment ofconventional gasoline would have continued.
3.14 Venezuela noted that"Petroleos deVenezuela, S.A." ("PDVSA") hadalready made costly
adjustments toitsproduction inorder tomeet thestatutory baseline requirements andhad
accelerated itsprogramme ofinvestments with aview tocomplying with theComplex Model
requirements. These adjustments hadreduced thevolume andvalue ofVenezuela 'scurrent and
anticipated gasoline exports totheUnited States below thelevels thatwould have prevailed 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 than those permitted bythestatutory baseline. Secondly, thestatutory
baseline wasmore stringent than theaverage oftheindividual baselines forrefineries located in
theEastern andGulf Coast states (where virtually allBrazilian gasoline wassold) because ofthe
inclusion inthenational average ofthestrict 1990 Californian standards. TheGasoline Rule also
favoured imports bydomestic refiners over imports byimporters who were notdomestic refiners.
Domestic refiners whose current production was"cleaner" than their individual baseline could
import gasoline with parameter levels above thestatutory baseline, could blend itwith their own
cleaner production andsellitontheUSmarket aslong asthemixture conformed with their
individual baseline. Importers who were notdomestic refiners hadtoconform tothestatutory
baseline inallinstances. Thus, theGasoline Rule affected thedistribution ofgasoline inthe
United States bychannelling imports todomestic refiners who hadanincentive totake advantage
oftheir privileged position bydemanding lower prices from foreign refiners.
3.16 Brazil stated thatthesame gasoline thatitused toexport totheUnited States market as
"finished" gasoline was, since theentry intoforce oftheGasoline Rule, considered only as
"blendstock8",which wassold atalower price. Thus, Brazil hadnotbeen able toexport
"finished" conventional gasoline totheUSmarket since 1January 1995. Brazilian refiners were
notcurrently producing reformulated gasoline .
3.17 TheUnited States replied thattheGasoline Rule didnottreat imported gasoline less
favourably than domestic gasoline overall. Theenvironmental goal oftheGasoline Rule wasto
regulate theoverall quality ofthegasoline sold intheUnited States. Each importer hadtosatisfy
onaverage thestatutory baseline, which approximated average gasoline quality consumed inthe
USin1990, anddomestic refiners hadtosatisfy onaverage their 1990 individual baselines, which
overall roughly represented 1990 USgasoline quality. Hence, overall domestically produced
gasoline hadtobeatleast asclean asforeign gasoline since roughly halfofdomestic gasoline
would be"cleaner" androughly halfwould bedirtier than gasoline using thestatutory baseline.
TheUnited States supplied thePanel with data documenting thenumber ofdomestic refiners with
baseline values both above andbelow thestatutory baseline forspecific parameters andemissions
levels upon which compliance with thenon-degradation requirements wasbased. This analysis
8Blendstock isunfinished gasoline which hastobeblended inorder tobesold asfinished gasoline.WT/DS2/R
Page 9
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 with several parameters above the
corresponding statutory values andseveral below. TheUnited States considered thataprevious
panel report hadrecognized that"there may becases where application offormally identical legal
provisions would inpractice accord lessfavourable treatment toimported products anda
contracting party might thus have toapply different legal provisions toimported products to
ensure thatthetreatment accorded them isinfactnolessfavourable"9.Since themajority of
importers didnothave thenecessary data touseMethods 1,2,or3,they would beprecluded
from supplying theUSmarket asthey would beunable toestablish anindividual baseline. In
fact, theGasoline Rule granted more favourable treatment toimports since identical treatment
would have inpractice excluded imported gasoline from theUSmarket.
3.18 TheUnited States argued thattheGasoline Rule applied 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 wasthefirst entity, within USterritory, thathad
control over thequality ofgasoline imported intotheUnited States. Thus, foreign refiners were
subject only totheindependent purchasing decisions ofUSimporters who hadtobalance the
products ofoneormore foreign refiners with thatofanother inorder tocomply with thestatutory
baseline. Thefactthatnosingle batch ofgasoline would bedeemed asnon-complying provided
additional flexibility toboth importers 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 with limited 1990 operations ortogasoline produced by
USblenders whose business entailed alack ofconsistency ofsources andquality ofthegasoline
produced. These producers hadincommon with theimporters theinability toestablish an
accurate individual baseline because their business characteristics orhistory were such thatthey
could notdetermine thequality oftheir gasoline asrequired byMethods 2and3.Although
theoretically, the1990 gasoline quality ofanimporter might beestablished byfirst determining
therefineries oforigin forallofthegasoline imported bythatimporter in1990, andthen
obtaining accurate andverifiable information onthequality ofthatsubset of1990 gasoline
produced attherefinery andexported totheparticular USimporter, theUnited States expected
thatonly avery limited number ofimporters would beable toestablish anindividual baseline
using such aprocedure. Inaddition, there were significant problems associated with establishing
the1990 gasoline quality offoreign refiners: tracking therefinery oforigin oftheimported
gasoline, establishing thequality ofthesmall subset ofgasoline shipped totheUnited States and
lack ofadequate 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 atsuch a
domestic refinery could beaccurately assessed. TheUnited States further argued thatimported
9"United States -Section 337 oftheTariff Actof1930", BISD 36S/345 (adopted on7November 1989).WT/DS2/R
Page 10
gasoline anddomestically produced gasoline were inthesame position with regard tothe
flexibility forcomplying with their respective 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 Rule hadaprotectionist purpose.
Thestatement inquestion actually reflected theUSgovernment 'scommitment when itissued the
final Gasoline Rule tocontinue addressing theissue ofhow imports were treated, andtheUS
government 'songoing concern thatenvironmental protection notbecompromised. This statement
alsoshowed thatthegovernment official 'sobjective wasadoption ofthebestenvironmental
provision thatwasfairtoallparties concerned. TheUnited States equally rejected Venezuela and
Brazil 'sargument thatthe1994 Proposal implied recognition thattheGasoline Rule discriminated
against imports. The1994 Proposal wasacontinuation ofEPA'sprior attempts todevelop
criteria thatwould protect theenvironment, minimize disruption toproducers, andtreat similarly
situated parties alike. ThefactthatEPA waswilling tomake thisattempt wasneither a
determination thattheGasoline Rule wasflawed noradetermination thatthe1994 Proposal was
feasible. This proposal 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 with Venezuela 'sclaim about decreased imports. Data from
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 rose from 11.5 to
18.5 percent inthefirst fivemonths of1995 compared tothesame period in1994. Regarding the
claim byVenezuela thattheGasoline Rule hadobliged itsrefineries tomake burdensome
investments, theUnited States noted thatitwasimpossible tojudge towhat extent PDVSA 's
investments were made inreaction toregulations, such astheGasoline Rule, inforce inany
particular export market. If,however, PDVSA 'sinvestments were related totheGasoline Rule,
they were more likely duetotheneed tocomply with theComplex Model starting in1998 than to
the1995-1998 non-degradation requirements 'programme. With respect tocompliance with the
Simple Model requirements, theUnited States considered thatPDVSA could upgrade theportion
ofitsgasoline output senttotheUnited States bysimply adding toitadditives such asoxygenates.
Inaddition, theamount ofcomplying gasoline thatcould beproduced, orthecostofproducing it,
washighly dependent onthefraction ofgasoline made tomeet aparticular specification. While a
domestic refiner hadtoproduce allitsgasoline output within certain limits, foreign refiners
typically produced only asmall fraction oftheir gasoline output fortheUSmarket. Thus foreign
refiners alsohadtheflexibility toselect their cleanest 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 thisyear suggested thatBrazil 'sdecreased exports
totheUnited States could hardly beattributed toUSregulations.
3.22 Venezuela agreed with theUnited States thatArticle IIIapplied toimported gasoline and
nottotheforeign refiners. TheGasoline Rule discriminated against imported gasoline by
applying thestatutory baseline tosuch gasoline while applying individual baselines toUSgasoline.WT/DS2/R
Page 11
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" wasnew toGATT andlacked alegal basis.
Moreover, Venezuela considered thatthese parties were not"similarly situated". Importers, who
obtained finished gasoline fordistribution toother wholesalers orretailers were not"similarly
situated" toblenders, who produced gasoline bymixing gasoline components produced byothers.
Itwasmore appropriate tocompare them to"jobbers" who obtained finished gasoline for
distribution toother wholesalers orretailers andwho used theindividual baselines associated with
thegasoline they acquired. Foreign refiners were "similarly situated parties" with respect toUS
refiners inthatthereasons given bytheUnited States astowhy USrefiners canestablish their
own baselines apply equally toforeign refiners.
3.23 Venezuela argued thattheUnited States didnotdeny theexistence ofdifferential treatment
forimported gasoline. Thus, ithadtoassume theburden ofproving thatsuch treatment wasno
lessfavourable totheimported product. According topastpanel reports, thetestwasnotwhether
therules were different butwhether such differences accorded nolessfavourable treatment to
imported products. Venezuela considered thatsuch ademonstration hadnotbeen made.
Venezuela disagreed with theinterpretation given bytheUnited States tothepanel report
"United States -Section 337oftheTariff Actof1930" andconsidered thatpanels interpreted the
words "treatment nolessfavourable" contained inArticle III:4 ascalling foreffective equality of
opportunities forimported products. TheUnited States 'assertion thatitwas"incumbent upon
theimporter tobalance theproducts ofoneormore foreign refiners with thatofanother" was
contrary tothatestablished understanding ofArticle III:4. Nosuch equality could exist ifthe
very ability 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 itwith above-statutory baseline gasoline. Venezuela considered thatthereasoning oftwo
previous panel reports10regarding thelossofcompetitive opportunities forimported products was
applicable tothiscase andledtotheconclusion thatimported gasoline should have thesame
distribution opportunities available toUSproduced gasoline, including theability tobesold
directly intocommerce with theapplication 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 Rule regulated every batch ofgasoline
produced inorimported intotheUS. Thefactthatthevery same gasoline with identical
characteristics would betreated differently under theRule ifproduced 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 with properties ofsulphur, olefins andT-90 above thestatutory baseline only had
tomix"additives such asoxygenates" toupgrade itsgasoline; infact, thevery composition ofthe
foreign gasoline hadtochange. Venezuela denied theUnited States 'claim thatVenezuela had
rejected the1994 Proposal. Venezuela hadsimply explained why some means bywhich theEPA
10"United States -Measures Affecting Alcoholic andMalt Beverages", BISD 39S/206 (adopted on19June 1992), and"Canada -Import,
Distribution and Sale ofCertain Alcoholic Beverages", BISD 39S/27 (adopted on18February 1992).WT/DS2/R
Page 12
proposed toachieve certain ends were notworkable from apractical standpoint, andpresented
alternatives toachieve thesame ends inamore practical andworkable manner.
3.26 Brazil argued thatthealleged benefit toimports deriving from thefactthat"roughly half"
ofthedomestic gasoline must be"cleaner" than imported gasoline (which, inBrazil 'sview had
notbeen demonstrated) didnotovercome thelessfavourable treatment accorded toimports
deriving from thefactthat"roughly half" ofthedomestic gasoline waspermitted tobe"dirtier"
than imported gasoline. This statement bytheUnited States implicitly admitted thediscrimination
contained intheGasoline Rule which required imported gasoline tobecleaner than halfofthe
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-vis other domestic products. Similarly, another panel report12hadconcluded thattheexposure
ofaparticular imported product toariskofdiscrimination constituted, byitself, aform of
discrimination. TheGasoline Rule exposed allimports tolessfavourable treatment than the
treatment accorded towhat theUnited 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 tousepost 1990 (Method 3)data toestablish their individual baselines whereas the
statutory baseline waspresumably established based onactual 1990 data. This contradicted the
USargument thatimporters were subject toanoverall average standard which wasequivalent to
thatimposed ondomestic refiners because baselines based ondata from different time periods
could notbeconsidered tobeequivalent.
3.27 Brazil argued thatUnited States 'reference tothe"Section 337" panel report wasirrelevant
since ithadnotdemonstrated inthisparticular case thattheapplication 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 why USimporters would notbeable to
establish anindividual baseline following Method 3,based onpost-1990 gasoline blendstock, since
according totheUnited States, importers were blenders andused blendstocks. Finally, the
comparison made bytheUnited States between aforeign refiner andaUSimporter was
inaccurate, foraforeign refiner hadtobecompared with aUSdomestic refiner.
3.28 Brazil rejected theargument thatimported gasoline wastreated similarly togasoline from
similarly situated parties. Imported gasoline produced byforeign refiners who hadunlimited
operations in1990 wastreated likegasoline produced byblenders anddomestic refiners who had
limited operations in1990, whereas itshould have been treated likegasoline produced by
comparable USdomestic refiners. Brazil further noted thatmost USblenders who were 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, mixitwith their own production and
measure thecompliance ofthefinal product against their individual baseline, whereas neither
blenders norimporters were allowed todothiswith respect totheir own blendstock, showed that
thesystem didnottreat likeproducts inasimilar way.
11"United States -Section 337 oftheTariff Actof1930", BISD 36S/345, (adopted on7November 1989).
12"EEC -Payments and Subsidies Paid toProcessors andProducers ofOilseeds andRelated Animal-Feed Proteins", BISD 37S/86
(adopted on25January 1990).WT/DS2/R
Page 13
3.29 Brazil agreed with theUnited States thatArticle IIIapplied togasoline andnottothe
producer ofgasoline. Inthisparticular case, thestandard applied togasoline hadbeen determined
with reference totheproducer ofgasoline. Brazil wasnotquestioning thispolicy choice assuch,
butthefactthatadifferent andlessfavourable standard applied toimported products. Inthecase
ofBrazil, thisdiscrimination wasillustrated bythefactthatthegasoline exported byBrazil as
"finished" conventional gasoline until 1January 1995 wasnow considered asamere "blendstock"
because itdidnotmeet thestatutory baseline requirements. Blendstock gasoline commanded a
lower price because thebuyer hadtomixitwith "cleaner" gasoline inorder tocomply with the
statutory baseline. Inconclusion, Brazil stated thatthefactthattheproduct produced bya
Brazilian refiner could notbesold intheUnited States asfinished gasoline while theidentical
product produced byaUSrefiner complying with itsindividual baseline could besold asfinished
gasoline constituted precisely thelessfavourable, discriminatory treatment Article IIIwasintended
toprohibit.
3.30 TheUnited States argued thatthecomplainants improperly focused ondeveloping foreign
refinery baselines, andhadnotdemonstrated how foreign refiners could accurately ascertain the
quality ofthesubset oftheir total gasoline production exported totheUnited States, even ifthey
were able toestablish thequality oftheir total 1990 output byusing Methods 1,2or3.Even
assuming thatthisproblem could beovercome byVenezuela andBrazil, itremained forother
foreign refiners. Byfocusing onforeign refiners 'baselines rather than onthemore logical
establishment ofimporters 'baselines, thecomplainants appeared toseek acommercial advantage
fortheir national oilcompanies over other foreign gasoline suppliers. This could favour those
importers who hadcommercial tiestosuch refiners over others, 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 who were 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 have precluded most importers from marketing gasoline intheUnited States, the
specific provisions applying toimports didnotviolate Article III.TheUnited States alsorejected
Brazil 'sclaim thatblenders were infactimporters andmaintained thatthey didfallintotwo
different categories, even ifsimilarly situated inother respects. (Oftheregistered entities that
were blenders orimporters, over athird were solely blenders andover athird were solely
importers.) TheUnited States considered thatthedifficulties supposedly experienced by
Venezuela andBrazil toexport gasoline totheUSmarket were groundless. Firstly, importers
could easily findlarge amounts ofgasoline with lowlevels ofsulphur andolefin, thus "offsetting"
Venezuela 'shigh sulphur andolefin content, because ofthetypical configurations ofrefineries
outside oftheUnited States. This wasevidenced bytheclean imports ofreformulated gasoline
thisyear andbythefactthat1995 exports from Venezuela didnotreflect anidentifiable impact of
theGasoline Rule. Secondly, Brazil 'schoice nottoexport finished gasoline, buttoexport
blendstock instead, wasunrelated toUSenvironmental regulations since theGasoline Rule didnot
contain anyrequirements astowhether importers imported gasoline ontheonehand, or
blendstock ontheother. Theconventional andreformulated gasoline requirements didnotaimat
establishing whether aproduct wasorwasnotgasoline. Rather, tobesold as"gasoline",
commercial contracts generally required aproduct tomeet certain 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
Page 14
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 hadbeen following adownward trend over
thelastfiveyears. Itwasequally difficult toknow theexact roleplayed bytheGasoline Rule
with regard totheinvestment programme ofVenezuelan refineries since anyrefiner operating at
theworld level needed asignificant reformer capacity. Venezuela 'sinvestment insuch areformer
unitlikely reflected overall Venezuelan market strategy. Moreover, whatever production
limitations PDVSA might have with respect tooneparticular refiner, blending offeedstock from
several refineries made higher levels ofstatutory-quality gasoline onaper-shipment basis possible.
Inaddition, theUSgovernment hadstudied refinery coststructure shortly after passage ofthe
Clean AirActandfound thatrefiners whose production ofreformulated gasoline wasabout 30%
orlessoftheir total gasoline production could produce thereformulated gasoline atlittle orno
incremental cost(i.e. investment costs) because oftheir ability toselect among blendstocks.
3.32 TheUnited States argued that, with respect totheparticular baseline tobeemployed by
domestic refiners thatimport, theRule'srequirement thatrefiners usetheir own baselines applied
only toconventional gasoline, anduptothevolume thattherefiner imported in1990. The
purpose oftheprovision wastoprevent adomestic refiner with abaseline more stringent thatthe
statutory baseline from avoiding thatstringent baseline byexporting gasoline produced atthe
domestic refinery andthen reimporting thatsame gasoline under thestatutory baseline, aconcern
raised toEPA inpublic comments.
3.33 Venezuela argued itwasnotfocusing onforeign refiners butonthesituation ofimported
gasoline. Theforeign refiner hadbecome anissue only because thecharacteristics of
USproduced gasoline setbytheGasoline Rule wasdetermined, 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 cited by
Venezuela were relevant because thesituations were similar. Venezuela disagreed with theUnited
States 'argument thatimporters could easily obtain suitable offsetting gasoline forVenezuela 's
gasoline quality. Thedata presented 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
data confirmed thatabove-statutory foreign gasoline wasnotpurchased byUSimporters. Thus,
foreign refiners were effectively obliged tocomply with thestatutory baseline requirements ifthey
wanted tosellgasoline intheUnited States.
b) Article III:1
3.34 Venezuela andBrazil claimed thatdiscriminatory baseline requirements contained inthe
Gasoline Rule violated Article III:1 forthesame reasons they violated Article III:4. Bydistorting
theconditions ofcompetition forforeign gasoline, both reformulated andconventional, they were
applied "soastoafford protection todomestic production". Venezuela alsonoted that
Article III:1 wasamore general provision than Article III:4. Thus, itwould notinsist onthe
panel ruling onArticle III:1 ifthePanel found theGasoline Rule tobeinconsistent with
Article III:4.
3.35 TheUnited States replied that, forthereasons expressed under Article III:4, theGasoline
Rule didnotafford protection todomestic production. Furthermore, since Article III:1 hadby
itself only anexhortatory character, itwasnotamenable toafinding of"violation" inadispute
settlement proceeding. APanel hadnever found anindependent violation ofArticle III:1.WT/DS2/R
Page 15
3.36 Brazil argued thatprevious disputes13,towhich theUnited States hadbeen aparty,
involved aviolation ofArticle III:1.
3. Article XX-General Exceptions
3.37 TheUnited States argued thattheGasoline Rule fellwithin thescope ofArticle XX
whether ornotitwasconsistent with other provisions oftheGeneral Agreement. Notall
measures described byArticle XXwere inconsistent with theGeneral Agreement. However, if
thePanel accepted thattheGasoline Rule wasconsistent with other provisions oftheGeneral
Agreement, inparticular Article III,itdidnotneed todecide whether themeasures atissue also
fellunder Article XX. Article XXguaranteed inanyevent thatthese measures were not
inconsistent with theGeneral 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, they argued, 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 andlegal support necessary tocarry thatburden with respect toanyofits
claims under Article XX.
4. Article XX(b)
a) "Protection ofHuman, Animal andPlant Life orHealth"
3.39 TheUnited States argued thatitwaswell established thatairpollution, andinparticular
ground-level ozone, presented health risks tohumans, animal andplants. Toxic airpollution was
acause ofcancer, birth defects, damage tothebrain orother parts ofthenervous system,
reproductive disorders andgenetic mutation. Itcould affect notonly people with impaired
respiratory systems, buthealthy adults andchildren aswell. Ozone wasalsoresponsible for
agricultural crop yield lossintheUnited States. Vehicular airtoxic emissions accounted for
approximately 40to50percent oftotal airtoxic emissions. TheGasoline Rule provisions 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
Rule fellwithin therange ofpolicies specified inArticle XX(b).
b) "Necessary"
3.40 TheUnited States argued thatthenon-degradation requirements forboth reformulated and
conventional gasoline were necessary toprotect human, animal andplant lifeorhealth. Using
individual baselines forconventional gasoline wasthequickest andfairest way toachieve 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 used for
allconventional gasoline, then allproducers whose gasoline wasdirtier than thisbaseline for
13"Canada -Administration oftheForeign Investment Review Act", BISD 30S/140 (adopted on7February 1984) andUnited States -
Measures Affecting Alcoholic and Malt Beverages" BISD 39S/206 (adopted on19June 1992).WT/DS2/R
Page 16
certain gasoline qualities would need tochange thecharacteristics oftheir production tomeet the
standard forthose qualities, andthose producers whose gasoline wascleaner than thebaseline
could degrade down tothebaseline. Theresult would bethesame overall average forgasoline,
butlarge segments ofgasoline producers would have been required tomake changes totheir
conventional gasoline production. Where future production exceeded their 1990 output, refiners
must meet thestatutory baseline. With respect toreformulated gasoline, individual baselines were
used forathree year transition period andapplied tothree gasoline qualities -sulphur, olefin and
T-90- which were required topreserve their average US1990 levels because EPA lacked data
about their precise emission effects. This approach avoided requiring large segments ofproducers
tomake changes intheir gasoline inorder tomeet asingle requirement, whereas itwasnotclear
whether andhow anysuch change wasneeded toavoid emissions increases. However, all
reformulated gasoline refiners must have begun toadjust their operations inorder tomeet thenew
reformulated gasoline requirements thatwould beineffect in1998 under theComplex Model.
Allregulated gasoline qualities would then bemeasured 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
with allproducers, inparticular, refiners thatwere only producing during partof1990, blenders
andimporters. These categories ofproducers were inadifferent situation since they lacked the
data necessary touseMethods 1,2and3,andrequiring them toestablish anindividual baseline,
likedomestic refiners, would have hadtheeffect ofprecluding them from theUSmarket. Thus,
assigning importers tothestatutory baseline ensured thatthey would notbeforced outofthe
market while treating similarly situated parties alike. Moreover, even ifinsome cases importers
might beable toestablish individual baselines derived from foreign refiner information, giving
importers achoice astowhich baseline tousewould inevitably have undermined theairquality
objective oftheregulation since business incentives would have induced them tousethecheapest
andleast stringent option, which would alsohave been themost polluting one. Taking into
account these concerns over gaming, EPA haddetermined thatnoother option wasfeasible
without having adverse effects ontrade. TheUnited States stressed thattheGasoline Rule applied
totheimporter andnottotheforeign refiner. Given thatthere hadtraditionally been avariety of
gasoline andblendstock qualities available onthemarket, importers were likely tohave the
flexibility toimport gasoline from various sources, some with levels above andothers below the
statutory baseline, aslong astheannual average fortheimporter metthestatutory baseline.
3.42 TheUnited States argued thatitwasnotfeasible togive individual baselines toforeign
refiners forvarious reasons. First, gasoline wasafungible international commodity anda
shipment ofgasoline arriving inaUSport generally contained amixture ofgasoline thathadbeen
produced atseveral foreign refineries. Therefore itwould bevery difficult, 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 foreach shipment ofimported gasoline thatwould present themost benefits interms ofthe
baseline restrictions. Thethird reason related tothedifficulties oftheUnited States toexercise
enforcement jurisdiction over foreign refiners. TheGasoline Rule could notbeenforced simply
byexamining theproduct attheborder butrequired EPA toaudit thefacilities ofrefineries in
order toverify, inter alia,thatthedata provided toestablish theindividual baselines were
accurate aswell astoensure future compliance. EPA alsoneeded other enforcement tools such as
criminal penalties, civil enforcement proceedings orcourt warrants, thatwould notbereadily
available touseoutside USterritory against arefinery located onforeign soil. Holding the
importer accountable fortheconduct oftheforeign refiner with whom hehasnotcolluded could
have been anunfair solution. TheUnited States recalled thatthepanel report "United States -WT/DS2/R
Page 17
Section 337oftheTariff Actof1930" hadacknowledged thatameasure might need toprovide
apparently lessfavourable treatment toimports insituations where it"might beconsiderably more
difficult toidentify thesource ofinfringing products ortoprevent circumvention oforders limited
totheproducts ofnamed persons"14,than forUSproducts. Thepresent case offered similar
differences inenforcement needs andcapabilities with respect totheidentification ofthesource of
gasoline.
3.43 TheUnited States disagreed with Venezuela 'sassertion thattheMay 1994 Proposal
demonstrated thefeasibility ofindividual baselines forforeign refiners. This Proposal wasa
continuation ofEPA'sefforts todevelop criteria thatwould protect theenvironment, minimize
disruption toproducers andtreat similarly situated gasoline alike, taking intoaccount the
comments andconcerns expressed byinterested parties. ThefactthatEPA made thisattempt was
neither adetermination thattheGasoline Rule wasflawed noradetermination thatthe1994
Proposal wasfeasible. The1994 Proposal contained several strict conditions governing the
establishment ofindividual baselines forforeign refiners, which showed thatconcerns stillexisted.
Moreover, itapplied only toreformulated gasoline because theindefinite application ofindividual
baselines forconventional gasoline andtheexpectation thatmany more foreign refiners would
supply theconventional market indicated thattheenvironmental riskassociated with allowing this
option were toogreat tojustify even itsproposal. Inpublic comments, the1994 Proposal had
been criticised asfavouring asmall group ofimporters over alltheothers. PDVSA andother
foreign refiners hadobjected thattheproposed conditions, inter aliathose related togasoline
tracking, were unworkable. Forthese reasons, theUnited States rejected Venezuela 'sassertion
thatEPA would have finalized thisProposal except fortheaction byCongress.
3.44 TheUnited States considered thatVenezuela 'scitation ofthetestimony ofaUS
government official wasinapposite. This testimony reflected theUSgovernment 'scommitment
when itissued thefinal Gasoline Rule tocontinue addressing theissue ofhow imports were
treated together with theconcerns 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 only illustrated
thatUSregulators wished toobtain amutually satisfactory solution with Venezuela. Moreover,
theRule explicitly 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 Rule discriminatory baseline requirements thatwould achieve thesame
objective. One such alternative wastoauthorize theuseofindividual baselines byforeign refiners
forboth reformulated andconventional gasoline. Another alternative wastorequire allUS
gasoline producers tomeet thestatutory baseline requirements. Athird alternative, inVenezuela 's
view, would have been toenforce theComplex Model asof1995, rather than 1998, soastotreat
both USandimported reformulated gasoline equally from thebeginning. Afourth alternative
would have been toauthorize theuseofforeign refiner individual baselines and, ifcompensating
emissions reductions were necessary, tospread theburden ofsuch compensation equally across all
gasoline, USandimported alike.
14BISD 36S/345, §5.32, adopted 7November 1989.WT/DS2/R
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3.46 Venezuela considered that, contrary totheUSargument, theuseofaforeign refiner
baseline wasfeasible. Itwasfeasible foraforeign refiner todevelop anindividual baseline,
relying onthesame types ofrecords anddata asUSdomestic refiners. Inthecase ofVenezuela,
PDVSA hadalltherecords necessary toaccurately determine anindividual baseline inconformity
with therequirements applicable totheUSrefiners, ashadbeen confirmed bythefirm
Turner, Mason andCo.which served asanindependent, EPA-approved auditor. Theforeign
refiner 'sindividual baseline would besubmitted toEPA forapproval andtocorrect anypossible
mistakes before theproduct could beimported intotheUnited States. EPA could then require 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 only be
relevant inverifying thecharacteristics ofgasoline asitentered theUnited States. This kind of
verification wasroutinely performed onmany types ofimported products and, inthecase of
gasoline, compliance foreach shipment could bedetermined attheport ofentry bytesting the
shipment andcomparing itsfuelproperties with theindividual baseline oftheforeign refiner.
Furthermore, since theimporter wascurrently liable towards EPA forgasoline 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 thatdidnotmeet certain standards,
andsubject tocivil andcriminal sanctions. Venezuela cited, inter alia,thecase ofimporters
being liable forproducts notmeeting thesafety standards promulgated bytheConsumer Product
Safety Commission. This demonstrated 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 todeal with thisproblem. 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 with EPA tothatend, presenting alternatives and
explaining why particular 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 than establishing their own baseline, thus affecting theairquality, waspurely speculative
forseveral reasons. EPA haditself recognised thatitdidnothave data about theaverage quality
ofgasoline imported in1990, andthus could notknow whether asignificant amount ofthat
gasoline imported was"cleaner" than thestatutory baseline. Available data indicated thatforeign
refiners were notlikely to"degrade" from their 1990 gasoline quality andtheimpact ofanysuch
activity would atmost bedeminimis .Moreover, USstatistics showed that, from January to
March 1995, imported gasoline represented lessthan twopercent oftotal USgasoline
consumption. Thus, even accepting (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 arise forlessthan onepercent oftotal USgasoline consumption. Thepractical
impact ofgaming wastoosmall tojustify discrimination against imported gasoline under
Article XX(b). Finally, several aspects oftheGasoline Rule areincompatible with theprofessed
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
Page 19
emissions from gasoline would vary, depending onwhich refiners were supplying it,andasa
consequence, theemissions levels could exceed thestatutory baseline. Moreover, EPA had
recently proposed several amendments totheGasoline Rule, such asprovisions 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 with thepurpose oftheUnited States which wastoaddress the
problem ofairpollution inorder toprotect human, animal andplant lifeandhealth. However,
Brazil considered thattheGasoline Rule programme didnotsatisfy therequirements of
Article XX(b), because theburden ofachieving thispurpose wasplaced disproportionately on
imported gasoline. Allimported gasoline hadtomeet the1990 average expressed inthestatutory
baseline whereas halfofthedomestic refineries could sellgasoline which didnotmeet the
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, EPA didnotwant toimpose on
domestic refiners whose gasoline wasdirtier than thestatutory baseline theburden ofchanging
their production characteristics, butitimposed precisely thisrequirement onforeign refiners.
Secondly, theUnited States hadnotdemonstrated tothePanel why domestic refiners whose
production wascleaner than thestatutory baseline would downgrade tothebaseline. And even
assuming thatsuch adowngrade would occur, theoverall airquality would notchange aslong as
therefiners with "dirtier" gasoline were required toupgrade tothestatutory baseline. Brazil
considered thataruleestablishing thestatutory baseline asaminimum with theadditional
requirement thatthose refiners who produced gasoline above thestatutory baseline continue todo
sowasanother option which would take care ofthedowngrading concern while atthesame time
improving airquality intheUnited States andeliminating discrimination against imports.
3.49 Brazil further argued thattheUnited States hadnotexplained why importers could not
establish anindividual baseline, especially using Method 3since importers presumably maintained
records oftheir imports andthus could have data ontheir 1990 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 didnothave sufficient data toestablish their own baselines.
Inthatcontext, theUnited States referred only to"difficulties" but,according toBrazil, mere
"difficulties" didnotcreate necessity within themeaning ofArticle XX(b). Moreover, assuming
thatthese difficulties were insurmountable, they would nevertheless notallow theUnited States to
discriminate against foreign gasoline since there wasanalternative measure, reasonably available,
which wastherequirement thatallgasoline, domestically produced andimported, meet thesame
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
such baselines 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
Page 20
concluded thattheUnited States hadnotdemonstrated why itwasnotpossible topermit foreign
refiners ofboth conventional andreformulated gasoline tousetheir own baselines.
3.51 Brazil argued thatthediscrimination under theGeneral Agreement ortheTBT Agreement
wasnotjustifiable even assuming thattheuseofforeign refiners 'individual baselines was
impossible. Ifitwere impossible toassign individual baselines toforeign refiners, theUnited
States would then bejustified inusing individual baselines fordomestic refiners only ifnoother,
non-discriminatory measure were available. AWTO Member wasnotpermitted toreview several
options, select oneinwhich discrimination wasunavoidable, andthen plead thattheselected
option required discrimination. Under Article IIIoftheGeneral Agreement -butalsounder
Article IoftheGeneral Agreement andArticle 2oftheTBT Agreement- aWTO Member was
obliged, when thepolicy option involved discrimination, tochoose another option when onewas
available. Inthisparticular case, there wassuch anavailable alternative, which wastoapply the
statutory baseline toallproducers ofgasoline.
3.52 TheUnited States maintained itsarguments regarding theimpraticability offoreign
refiner 'sbaseline. Itargued thatcompliance with requirements based onforeign refinery
baselines could notbeestablished only bysampling gasoline onitsarrival ataUSport ofentry,
because itwould benecessary todetermine therefinery oforigin forsuch imported gasoline.
This type ofdetermination would bedifficult, ifnotimpossible, duetothefungible mixing of
gasoline thatoccurs before arrival inaUSport ofentry. Theenforcement provisions ofother US
statutes cited byVenezuela tonegate thisconcern were inapposite, because those statutes all
involved matters thatcould beresolved byinspection oftheproduct byCustoms officials atthe
border. TheUnited States alsonoted thatthere wasnoanalogous concern with identifying 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 oflowfluid catalyst unitcapacity among foreign refiners, sulphur andolefin levels in
imports were likely tobelowcompared totheUSstatutory baseline, thus leaving 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 used inrefining 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, who hadample
flexibility, notavailable todomestic refiners, toselect among blendstocks. TheUnited States
concluded that, contrary toVenezuela 'sandBrazil 'sclaim, Article XXdidnotrequire adoption of
thestatutory baseline asanational standard even ifthedifficulties associated with the
establishment ofindividual baselines forimporters were insurmountable. Application ofthe
statutory baseline todomestic producers ofreformulated andconventional gasoline in1995 would
have been physically andfinancially impossible because ofthemagnitude ofthechanges required
inalmost allUSrefineries; itthus would have caused asubstantial delay intheprogramme.
Weighing thefeasibility ofpolicy options ineconomic ortechnical terms inorder tomeet an
environmental objective wasalegitimate consideration, anddidnot,initself, constitute
protectionism, asalleged byVenezuela andBrazil. Article XXdidnotrequire agovernment to
choose themost expensive possible way toregulate itsenvironment. Inthecase athand, itwas
notnecessary toassign domestic refiners tothestatutory baseline forthenon-degradation
requirements forthereasons stated above.WT/DS2/R
Page 21
3.53 TheUnited States argued thatthelack ofavolume limitation fortheuseofindividual
baselines under thereformulated gasoline programme wasnotexpected toaffect thesuccess of
thatprogram. USdata showed thatrefineries with thehighest olefin andsulphur levels intheir
baselines (i.e. thedirtiest baselines) asagroup hadnotextended their market share after thestart
upofthereformulated gasoline programme. This wasconsistent with EPA'soriginal expectations
thattheshort time period during which individual baselines were used inthereformulated
programme would notprovide anincentive forrefiners torevise their investment andproduction
decisions based onwhether their baselines were above orbelow thestatutory baseline. The
United States alsoargued thatthevarious baseline adjustments allowed under theGasoline Rule
either redressed disadvantages occurring asaresult ofgovernment requirements, ordealt with
situations where theUSgovernment didnothave data forafullyear'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 they hadrelied 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
have exported totheUnited States gasoline cleaner than thestatutory baseline would have an
incentive todegrade down tothestatutory baseline. Venezuela rejected thisassumption andstated
thatthere wasnoeconomic incentive forarefiner tooperate itsrefinery inalessthan optimal
manner toincrease thelevel ofafuelproperty such assulphur 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 sold intheUnited States didnot
become more polluting than in1990 were "laws orregulations which arenotinconsistent with the
provisions oftheGeneral Agreement". They were measures forwhich, pursuant toArticle XX(g)
andXX(b), "nothing in[theGeneral Agreement] shall beconstrued 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 Rule fellwithin thescope ofArticle XX(d).
3.56 Venezuela considered thattheUnited States hadnotclearly established which were the
"laws orregulations" which were notinconsistent with theGeneral Agreement andwith which
compliance wassecured, andhence hadfailed todemonstrate such consistency. Venezuela noted
thataprevious panel hadfound thatameasure wasdeemed to"secure compliance with" only ifit
waseffective to"enforce obligations" under laws orregulations consistent with theGeneral
Agreement, asopposed toensuring thebroader attainment ofanobjective15.When stating that
"the baseline 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 and Components", BISD 37S/132, para. 5.17-5.18 (adopted on16May 1990).WT/DS2/R
Page 22
necessary toenforce. Moreover, forthereasons expressed under Article XX(b), theGasoline
Rule wasnotnecessary. Thus, theUnited States didnotmeet therequirements ofArticle XX(d).
3.57 Brazil considered that, forthereasons ithadalready developed under Article XX(b), the
United States failed todemonstrate thattheGasoline Rule was"necessary" tosecure compliance
with theClean 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 Rule fellwithin 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 such asVOCs, NOx and
toxics. Inthemost polluted areas, itcould become chronically contaminated andremain soover
long periods oftime. Aircontaining pollutants could move long distances tocontaminate other
airsheds. Moreover, bystopping airdegradation, theCAA alsoprotected other exhaustible
natural resources such aslakes, streams, parks, crops andforests, which were affected byair
pollution. Thus, theobjectives underlying thereformulated andconventional gasoline
programmes fellwithin therange ofpolicies topreserve both clean airand, consequently, other
natural resources.
3.60 Venezuela noted thatitshared with theUnited States aconcern fortheimpact ofdirty air
onhealth, butclaimed thattheUnited States 'arguments regarding theapplicability of
Article XX(g) tothiscase were both factually 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 oftheir exploitation, Venezuela doubted thatclean airwasanexhaustible
natural resource within themeaning ofarticle XX(g). Venezuela considered thatclean airwasa
"condition" ofairthatwasrenewable rather than aresource thatwasexhaustible, such as
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 only ifitwas"primarily aimed at"conserving that
resource17.TheUnited States hadnoteven attempted 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
only theprotection ofhealth astheprimary objective forthereformulated andconventional
gasoline requirements, which wasirrelevant toanArticle XX(g) analysis. Venezuela noted thatit
16"United States .Restrictions onImports ofTuna", DS29/R, 16June 1994 (unadopted), "Canada -Administration oftheForeign
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 on22March 1988).WT/DS2/R
Page 23
hadpreviously demonstrated tothePanel thattheGasoline Rule methodology contained loopholes
which undermined itsown conservation objectives, thus confirming thatthediscriminatory
baseline system could notbe"primarily aimed at"theconservation ofanexhaustible natural
resource.
3.62 TheUnited States disagreed with theclaim thatclean airwasnotanexhaustible natural
resource within themeaning ofArticle XX(g). TheUnited States maintained thatairwas
undoubtedly anatural resource which could beexhausted ifitwasrendered unfit forhuman,
animal orplant consumption. This wassimilar totherecognition inprevious panel proceedings
thatfishwere an"exhaustible natural resource" since their populations could bedepleted or
rendered extinct18.
b) "...made effective inconjunction with restrictions ondomestic
production orconsumption"
3.63 TheUnited States considered thattheGasoline Rule restricted domestic production of
gasoline byrequiring manufacturers tolimit their production ofgasoline sothatover thecourse of
theyear theaverage ofparticular components ofthegasoline didnotexceed certain maximum
levels. Italsorestricted domestic consumption byensuring thattheaverage ofthose components
ofgasoline sold didnotexceed 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 hadonly referred torestriction ondomestic
production andconsumption ofgasoline.
3.65 Brazil argued that, even assuming thatclean airwasanexhaustible natural resource, the
Gasoline Rule didnotrestrict domestic production orconsumption ofclean air. Atbest, the
Gasoline Rule sought toincrease production ifnotconsumption ofclean air,nottorestrict it.
Moreover, neither theCAA northeGasoline Rule restricted inanyway thequantity ofgasoline
thatcould beproduced orconsumed intheUnited States, butmerely regulated itsquality. Since
neither theproduction northeconsumption ofairorgasoline wasrestricted bytheCAA orthe
Gasoline Rule, theGasoline Rule didnotfallunder Article XX(g).
3.66 TheUnited States argued thattheGasoline ruledidrestrict domestic consumption ofclean
airthrough itsrestriction ofemissions thatpolluted theair. This wassimilar torestrictions
applied oncarsinorder toconserve fuel. Inthiscase, theGasoline Rule'sapplication toimports
-including thebaseline rules- wasprimarily aimed atrendering effective restrictions ondomestic
production ofdirty air,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 Rule applied equally tosimilarly situated parties. Importers andblenders
were required tomeet theparameters of1990 average USgasoline because they could not
ascertain therefinery oforigin andthequality ofthegasoline they marketed 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 and Tuna Products from Canada, BISD 29S/91 (adopted on22February 1982).WT/DS2/R
Page 24
themarket. Unlike domestic refiners, importers hadtheflexibility torelyonavariety ofsources
soastomeet anannual average quality ofgasoline. Moreover, foreach oftherequirements,
about halfofUSgasoline produced bydomestic refiners hadtobecleaner incertain respects than
theannual average gasoline quality supplied byimporters. Inaddition, aportion oftheUS
gasoline market wasbeing supplied with gasoline bydomestic refiners which hadtomeet the
statutory baseline because their gasoline could notbepresumed tohave been partofthegasoline
pool in1990. 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 Rule didnotconstitute adisguised
restriction ontrade since itsobjective wastoensure nodegradation from 1990 levels foremissions
andairpollutants, ahealth objective thathadnothing todowith arestriction ontrade. The
provisions were transparent andimposed thesame overall requirements, stemming from thesame
objective, onimported asondomestic gasoline. Theevolution oftheprovisions atissue
demonstrated thattreatment ofimports hadnothing todowith thefundamental 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 inthelight oftheir small (2to6percent) share oftheUSgasoline market. Inview
oftheuncertainty oftheemissions effects ofthese parameters irrespective ofthesource of
gasoline, in1991 EPA agreed toregulate, with respect toreformulated gasoline, onthebasis of
individual baselines forthethree non-degradation requirements.
3.69 Venezuela argued thatthe75%Rule which applied toonly afewrefineries thatwere
historically determined didgrant anadvantage togasoline imported bytheUnited States from
certain third countries, 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
been argued bytheUnited States, butonly tothemost-favoured-nation obligation oftheGeneral
Agreement. Moreover, ashadbeen previously argued byVenezuela, thediscriminatory baseline
requirements oftheGasoline Rule were notjustified byenvironmental concerns, butintended to
distort theconditions ofcompetition infavour ofUSgasoline against imported gasoline. Hence,
theGasoline Rule wasadisguised 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 third countries
based upon thecriteria ofownership andquantity ofexports, theGasoline Rule constituted 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 on26May 1983) and"United
States -Prohibition onImports ofTuna and Tuna Products from Canada", BISD 29S/91, para. 4.8(adopted on22February 1982).WT/DS2/R
Page 25
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 perdaythan would bepossible absent the
discrimination. Theprice ofVenezuelan gasoline anditsshare intheUSmarket, aswell asthe
investment programme forVenezuelan refineries, hadalsobeen adversely 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 Rule haddistorted 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
over thelastfiveyears, anditsdecrease inexports in1995 wasentirely consistent with theearlier
decline.
C. Agreement onTechnical Barriers toTrade
1. Article 2-Preparation, Adoption andApplication ofTechnical
Regulations byCentral Government Bodies
a) Whether orNottheGasoline Rule isaTechnical Regulation
3.73 Venezuela andBrazil submitted thattheGasoline Rule wasa"document" which laiddown
"product characteristics" and"with which compliance wasmandatory" forboth conventional and
reformulated gasoline. Therefore, itwasa"technical regulation" within themeaning ofAnnex I
oftheTBT Agreement.
3.74 TheUnited States replied thatthenon-degradation requirements contained intheGasoline
Rule didnotspecify particular product characteristics, andtherefore didnotmeet theTBT
Agreement 'sdefinition ofa"technical regulation". Shipments ofgasoline ofwidely varying
characteristics could besold byaparticular entity, theonly requirement being thatattheendof
theyear, theaverage ofcertain oftheir chemical ingredients fellbelow certain levels. Thus, these
provisions were requirements oncompanies, notonproducts, andcompliance wasmeasured ona
company level forimporters andblenders, andonarefinery level fordomestic refiners, butnot
onaproduct basis. These provisions constituted requirements ontotal annual sales, butwere not
technical regulations within themeaning oftheTBT Agreement. Therefore, theTBT Agreement
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 IoftheTBT Agreement. Moreover, the
United States itself admitted thisfactwhen saying thattheRule dealt with "chemical ingredients".
Venezuela wasalsooftheview thataveraging didnotmake anydifference forthepurpose oftheWT/DS2/R
Page 26
TBT Agreement since anyaveraging techniques required examination oftheproperties ofeach
individual gasoline shipment. Excluding from thecoverage oftheTBT Agreement regulations
relying onaveraging would open agaping loophole. Under thisinterpretation, theobligation of
theAgreement could beavoided byaveraging. Venezuela considered thattheUnited States
wanted toavoid examination under theTBT Agreement inorder toescape therequirements
contained inArticle 2.2.
3.76 Brazil objected totheUnited States 'argument thattheGasoline Rule wasnotatechnical
regulation within themeaning oftheTBT Agreement. 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 tomeet anyprecise standards since therequirements
were measured onanannual average basis, andthus thatthe"product" wastheannual quantity of
gasoline produced, blended, orimported, rather than each sub-unit, wasirrelevant. Annual
production inthiscase wassimply theunitofproduction towhich thestandard wasapplied.
Brazil noted thatiftheUnited States were correct initsassertion thattheindividual baselines
applied torefiners andnottogasoline, thediscrimination would then beeven more apparent
because foreign refiners hadnobaseline. Inthiscase amandatory 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 forbyEPA intheGasoline Rule inorder toregularly check thequality of
gasoline anditsproperty attherefinery level argued infavour ofatechnical regulation setting
forth product characteristics. Moreover, theUnited States 'own statements tothePanel
acknowledged thisfactwhen declaring thatthe"requirements" oftheGasoline Rule were
"necessary toprotect human, animal andplant lifeorhealth". Inconclusion, Brazil considered
thatarulewhich obliged imported gasoline thatdidnotmeet thestatutory baseline tobeblended
with gasoline thatexceeded these requirements inorder tomeet themandatory statutory
requirements wasa"document" with mandatory product characteristics.
3.77 TheUnited States argued thattheTBT Agreement hadbeen designed toelaborate onthe
disciplines ofArticle IIIoftheGeneral Agreement foravery specific 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 tohave devices to
reduce emissions were nottechnical regulations, though they were inwriting, mandatory and
specified "characteristics". Contrary towhat wasargued bythecomplainants, there were no
minimum ormaximum content oremissions requirements applied with respect tothenon-
degradation requirements forindividual shipments ofeither reformulated orconventional gasoline
under theSimple Model. Ashipment oreven saleofgasoline wasnotrequired tomeet specific
product characteristics with respect tothenon-degradation requirements atissue. TheGasoline
Rule wasnotsetting uniform criteria interms ofgasoline characteristics; standardization was
neither thepurpose northeresult oftheregulation. TheUnited States concluded thatthe
complainants were interpreting theterm "technical regulation" outofcontext andsuch an
interpretation, ifaccepted, would introduce intotheTBT Agreement many measures which were
infactnotintended tobecovered. TheUnited States alsoargued thatBrazil 'sview thata
"product" inthiscase bedefined asanentire year'sproduction, rather than ashipment orabatch,
would bearadical departure from theconcept of"product" under theWTO andwaswithout basis
intheWTO.WT/DS2/R
Page 27
b) Article 2.1
3.78 Venezuela argued thatArticle 2.1oftheTBT Agreement incorporated theobligations of
national treatment andMFN setforth inArticles IIIandIoftheGeneral Agreement. Venezuela
andBrazil argued that, asatechnical regulation within themeaning oftheTBT Agreement, the
Gasoline Rule laiddown product characteristics forimported Venezuelan andBrazilian gasoline
thatgave lessfavourable treatment than thatprovided toimports from certain third countries and
toUSgasoline. Thus, itviolated theobligations ofnational treatment andMFN treatment
contained inArticle 2.1oftheTBT Agreement.
c) Article 2.2
3.79 Venezuela andBrazil claimed thattheGasoline Rule created unnecessary obstacles to
international trade inviolation ofArticle 2.2oftheTBT Agreement.
3.80 Venezuela considered thattheGasoline Rule violated Article 2.2fortworeasons. First,
there wasevidence thatthisRule hadbeen "prepared, adopted orapplied with aview to...
creating obstacles tointernational trade". TheUnited States didnotintend todiscriminate against
imported gasoline when itinitiated theregulatory process. However, crucial decisions involving
thespecific discriminatory aspects oftheRule were knowingly made both during theregulatory
process andthereafter. Thetestimony under oath made inApril 1994 byagovernment official to
theUnited States Senate wasevidence thatthediscrimination wasintentionally adopted asameans
ofaffording protection togasoline produced intheUnited States.
3.81 Second, theGasoline Rule hadtheeffect ofcreating anunnecessary obstacle to
international trade because themore stringent requirements imposed onimported gasoline were
notnecessary tofulfil thestated objective oftheRule which istoimprove airquality intheUnited
States. Inthisrespect, Venezuela considered thatArticle 2.2oftheTBT Agreement provided
greater guidance with respect totheconcept of"necessity" than Article XXoftheGeneral
Agreement, especially itssecond sentence which expressly calls foracertain balance. Article XX
spoke only ofmeasures thatare"necessary", which hadbeen inprevious cases strictly interpreted
tomean thatameasure isnotnecessary ifitisnottheleast trade-restrictive measure reasonably
available20.Asexplained inrelation ofArticle XX(b), theGasoline Rule clearly pursued atrade-
restrictive approach despite thefactthatalternatives consistent with theGeneral Agreement were
available, while therisks ofnon-fulfilment ofanylegitimate objective hadbeen deliberately
exaggerated. EPA itself hadacknowledged thatlesstrade-restrictive alternatives ofachieving the
airquality objective were possible andthe1994 Proposal, though notentirely consistent with the
General Agreement, wasonesuch alternative.
3.82 Venezuela further considered thattherisks ofnon-fulfilment ofalegitimate objective had
tobeassessed against "scientific andtechnical information" which, inthecase athand, hadnever
been provided despite various requests made byVenezuela, inparticular under Article 2.5ofthe
TBT Agreement. Article 2.2oftheTBT Agreement required thatthetrade-restrictive elements of
atechnical regulation beeliminated unless "scientific andtechnical information" orother reliable
factual data demonstrate thatthose elements were necessary tofulfil alegitimate objective. The
United States hadnever submitted scientific evidence ortechnical data demonstrating thatthe
different baseline requirements were necessary tofulfil theairquality objectives buthadalways
relied on"gaming" asthejustification. EPA hadnever attempted toanalyze how much imported
gasoline would besusceptible togaming orwhether, incase ofgaming, theimpact onhealth
20"United States -Section 337oftheTariff Actof1930", BISD 36S/345, adopted on7November 1989 and"Thailand -Restrictions
onImportation ofand Internal Taxes onCigarettes", BISD 37/200, adopted 7November 1990.WT/DS2/R
Page 28
objectives would beunacceptable. Inthatregard, Venezuela recalled thatEPA itself 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" than thestatutory baseline.
Moreover, solittle gasoline wasimported thatthepotential differential emissions -between
individual andstatutory baselines- would nothave anysignificant impact ontheaverage emission
quality ofthegasoline consumed intheUnited States.
3.83 Brazil stated that, forthereasons already expressed under arguments relating toArticles I
andIIIoftheGeneral Agreement andArticle 2.1oftheTBT Agreement, theGasoline Rule
created "unnecessary obstacles tointernational trade" inamanner contrary toArticle 2.2ofthe
TBT Agreement.
2. Article 12-Special andDifferential Treatment
ofDeveloping Country Members
3.84 Venezuela observed thatArticle 12oftheTBT Agreement imposed certain obligations on
theUnited States with respect todeveloping countries. Venezuela didnotseek anyspecial
treatment butmerely wanted itsgasoline tobeheld tothesame baseline requirements asUS
gasoline. Venezuela stated thatitwasnotasking forthePanel toruleunder Article 12but
intended topoint outthatthediscriminatory treatment affecting Venezuelan gasoline was
particularly objectionable inthelight ofthatprovision.
IV. SUBMISSIONS BYINTERESTED THIRD PARTIES
A. The European Communities
4.1 TheEuropean Communities (the"EC") stated that, asanexporter totheUnited States of
gasoline forautomobiles andother fueloils, ithadasubstantial interest inthematter before the
Panel. In1994, thetotal volume ofEC-12 exports totheUnited States forgasoline represented
6'423'411 metric tonnes. This volume hadincreased since theenlargement oftheEC, on
1January 1995. TheECdeclared thatitdidnotcontest theright oftheUnited States toenforce
legislation whose purpose wastoprotect human, animal orplant lifeorhealth. However, such
measures hadtobeinconformity with theprovisions oftheWTO Agreement andnotbeapplied
sothatimports from third countries were discriminated against, thatthedomestic industry was
afforded protection, orthatdisguised restrictions were imposed oninternational trade.
4.2 TheECstated that, while agreeing with theUnited States thattheapplication offormally
identical provisions could, incertain cases, accord inpractice lessfavourable treatment to
imported products, itcould notagree with theconsequences 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, itwasthen sufficient
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 new rules which could beapplied identically todomestic andimported goods.
4.3 TheECargued thatrisks ofviolations ofArticle III:1 and4resulted from thefactthat
Methods 2and3ofestablishing individual baselines were only available todomestic refiners.WT/DS2/R
Page 29
TheECdidnotwant todiscuss theaccuracy ofthearguments developed bytheUnited States with
respect tothefeasibility ofindividual baselines forforeign refiners, butassumed, forthesake of
argument, thatMethods 2and3could notbeapplied toimported gasoline inthiscase.
Considering theexplanations given bytheUnited States astowhat thestatutory baseline
represented, andassuming they were correct, theECfailed toseewhy USrefiners could notbe
subject tothestatutory baseline, likeimporters andblenders. Such ameasure would have been in
total conformity with Article III,paragraphs 1and4.Inaddition, itappeared from the
information submitted bythemain parties tothedispute thatbarely halfoftheUSrefiners had
their individual baselines approved atthetime oftheentry intoforce oftheRule. While not
affecting theexistence oftheviolation, thisfactproved thattheapplication ofthestatutory
baseline erga omnes would probably notaffect significantly thecompetitive position ofUS
refiners.
4.4 TheECunderstood theconcern expressed bytheUnited States thatcertain importers and
blenders, who hadtheflexibility toselect gasoline from various sources, might have anadvantage
over USrefiners 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 have produced extremely "dirty"
gasoline in1990, theGasoline Rule didnotgive animmediate incentive forUSrefiners toadapt
their production, whereas increased access toUSmarket forthird country gasoline wasdependent
onagradual approximation oftheir quality compared with thestatutory baseline. Therefore, the
Gasoline Rule entailed atthevery least aserious 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 used togrant thattreatment were based onthesituation in1990. Animporter meeting
therequired criteria after thatdate could nothave invoked it.Hence, theRule could only benefit
certain countries where UScompanies hadinvested inlocal refiners before 1990. As
acknowledged bytheUnited States, thiscould have included Canada, where certain UScompanies
owned refineries atthattime. However, thiscould nothave benefitted production ofrefiners
located incountries where, forinstance, thepetroleum industry wasmostly, ifnotexclusively,
owned bytheState in1990. Therefore, the75%Rule wasdefacto notbased onobjective
criteria, andhence contrary toArticle IoftheGeneral Agreement. TheECfurther argued that
thePanel should make afinding onthisRule despite thefactthatitcould nolonger beinvoked.
APanel should beguided initsexamination bythecontent ofthe"matter" -the75%Rule inthe
present case- referred toit23.Adetermination bythePanel ontheconformity ofthatrulewith
Article Iwould help avoid thiskind ofmeasure being found inthefuture inthelegislation ofa
WTO Member.
21"United States -Section 337 oftheTariff Actof1930", BISD 36S/345 (adopted on7November 1989).
22"EEC -Payments andSubsidies Paid toProcessors 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 (not adopted).WT/DS2/R
Page 30
4.6 Astowhether theGasoline Rule fellunder theTBT Agreement, theECstated thatit
agreed with theUnited States thattherequirements onchemical ingredients didnotneed tobe
satisfied byeach shipment andalsothat, themeasures atissue being based onayearly average,
theimporters remained freetoimport different varieties ofgasoline provided thattheannual
average mettherequirements. However, theECdoubted thatastandard should beexcluded from
thescope oftheTBT Agreement only forthereason thatitrequired compliance onayearly basis
instead ofonashipment basis. Itwasclear thattheimporter hadonly tobalance various qualities
ofgasoline inorder tomeet thestatutory baseline. From thepoint ofview oftheexporting
country, theGasoline Rule created aclear incentive foradapting itsproduction standards ifit
wanted tomaintain orincrease itsshare oftheUSmarket. Exporting refiners notadapting their
production standards toUSrequirements (oratleast notgradually narrowing thedifference down
tototal compliance) would beunlikely toincrease their sales intheUSsince 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,
thus obliging foreign refiners tomeet thestatutory baseline foreach shipment. Forthisreason,
theECcould notagree with theUnited 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 upitsown importation network intheUnited
States waslikely tobeobliged toimmediately adapt itsproduction toUSstandards inorder notto
have toimport gasoline ofdifferent qualities atthesame time asitsown gasoline (with therelated
increased costs). Therefore, theECbelieved thattheGasoline Rule imposed atechnical
regulation within themeaning oftheTBT Agreement. TheECfurther considered that, ifone
were toagree with theUSarguments, such anaveraging system could represent apotential for
circumvention oftheTBT Agreement, mainly inthefield ofchemical products where itwasused
relatively frequently. Ifthemere useofanaveraging requirement wassufficient toexclude the
TBT Agreement from applying tocertain environmental standards, then theincreased legal
protection resulting from Article 2.2ofthatAgreement compared, forinstance, with Article 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
wasoftheview thattheGasoline Rule, intheway itwasapplied, didnotmeet therequirements
ofArticle XXbutimposed adisguised restriction ontrade byallowing USrefiners tocontinue
producing "dirty" gasoline meeting their individual baselines, while imposing actual constraints on
foreign producers toadapt their production toUSstandards. Such aprotectionist effect would
probably notbecreated ifidentical baselines were applied toboth imported anddomestically
produced gasoline. Moreover, asdemonstrated above, theapplication ofthestatutory baseline to
both domestic andimported gasoline would have achieved thesame aimwithout introducing
discrimination between sources ofsupply. Inanyevent, measures inconsistent with theGeneral
Agreement were notnecessary toenforce the1990 CAA amendment. Therefore, theEC
considered that, even iftheGasoline Rule didnotconstitute a"means ofarbitrary orunjustifiable
discrimination between countries where thesame conditions prevail", itwasobviously ameans to
alleviate therestructuring efforts oftheUSrefining industry while atthesame time requiring
foreign producers toadapt almost immediately their production. Hence, while officially pursuing
24"United States -Restrictions onImports ofTuna", DS21/R, 3September 1991, para. 5.22 (not adopted).WT/DS2/R
Page 31
environmental objectives, itintroduced adisguised restriction ontrade. TheECconcluded that
thebaselines system wasnotproportionate anddidnotmeet thenecessity testofArticle XX.
B. Norway
4.9 Norway stated thatitsreasons forreserving itsrights asathird party inthiscase were in
legal andpractical terms very similar tothose argued byVenezuela andBrazil intheir respective
requests fortheestablishment ofapanel. TheGasoline Regulation denied national treatment to
gasoline imported from Norway. Therefore, Norway supported Venezuela andBrazil 'srequest
thatthePanel findtheGasoline Rule tobeinconsistent with Articles IandIIIoftheGeneral
Agreement, andwith Article 2oftheTBT Agreement.
4.10 Norway saidthattheNorwegian State OilCompany ("Statoil") wasexperiencing avery
difficult situation because oftheway theGasoline Rule operated. There wasaconsiderable
incentive forStatoil tobeable toexport totheUSmarket ascompared toother markets. In
1989, Statoil built theMongstad refinery with theobjective ofselling totheUnited States some
0.5millions tons peryear outofatotal gasoline production of2,5millions tons peryear. In
1990, Statoil sold atotal ofabout 470'000 tons ofgasoline totheUnited States, outofwhich
about 350'000 tons came 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 until 1998 andforconventional gasoline indefinitely, theMongstad refinery would not
competitively beable toproduce 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 sold thatyear.
V. INTERIM REVIEW
5.1 On18December 1995, theUnited States requested thePanel toreview inaccordance with
Article 15.2 oftheDSU precise aspects oftheinterim report thathadbeen issued totheparties on
11December 1995, andtohold ameeting forthatpurpose. ThePanel metwith theparties on3
January 1996 inorder tohear their arguments 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 dealt with issues thatwere notdisputed bytheparties orwere
unnecessary tothePanel ’sconclusion thataspects oftheGasoline Rule violated Article III:4.
While thePanel didnotagree with allthearguments made bytheUnited States, itdidrevise the
report totake intoaccount those arguments with which itagreed andparagraphs 6.5and6.9-
6.11 ofthefindings 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 -6.25 and6.27 -6.28 ofthefindings reflect thePanel ’sresponse.WT/DS2/R
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5.4 Inrespect oftheinterim report ’sdiscussion ofArticle XX(d), theUnited States objected
tothePanel ’suseofspecific terms which didnotappear inthetextoftheprovision. ThePanel
accepted theUSarguments andparagraph 6.31 oftherevised 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 -6.36 and6.40 -6.41 of
thefindings reflect thePanel ’sresponse.
5.6 Inrespect oftheinterim report ’sdescriptive section, Venezuela andtheUnited States
suggested further changes which thePanel took intoaccount inre-examining thatpartofthe
report. ThePanel revised thedescriptive section ofthereport where itaccepted theneed for
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 Rule permits only
gasoline ofaspecified cleanliness (“reformulated gasoline ”)tobesold inareas ofhigh air
pollution. Inother areas, only gasoline nodirtier than thatsold inthebase year of1990
(“conventional gasoline ”)canbesold.
6.2 TheGasoline Rule applies torefiners, blenders andimporters ofgasoline. Itrequires that
certain chemical characteristics ofthegasoline inwhich they deal respect, onanannual average
basis, defined levels. IntheGasoline Rule some ofthese levels arefixed; others areexpressed as
“non-degradation ”requirements. Under thenon-degradation requirements, each domestic refiner
must maintain, onanannual average basis, therelevant gasoline characteristics atlevels noworse
than its“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, then itmust usedata
onthequality ofblendstock produced in1990 (“Method 2"). Ifthese twomethods donotresult
insufficient evidence, therefiner must alsousedata onthequality ofpost-1990 gasoline
blendstock orgasoline (“Method 3").
6.3 Importers arealsorequired touseanindividual baseline, butonly inthecase (unlikely,
according totheparties tothedispute) thatthey areable toestablish itusing Method 1data.
Unlike domestic refiners, they arenotallowed toestablish anindividual baseline byusing the
secondary ortertiary data specified inMethods 2and3.Ifanimporter cannot produce Method 1
data, then itmust usea“statutory baseline ”which theUnited States claims isderived from the
average characteristics ofallgasoline consumed intheUnited States in1990. Some other
domestic entities (such asrefiners with only partial orno1990 operations, andblenders with
insufficient Method 1data) arealsoassigned thestatutory baseline. Exceptionally, importers that
imported in1990 atleast 75percent oftheproduction ofanaffiliated foreign refinery aretreated
asdomestic refiners forthepurpose ofestablishing baselines. Since thisdispute concerns only theWT/DS2/R
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Gasoline Rule’snon-degradation requirements, andnotreformulated andconventional gasoline as
such, thePanel willrefer generally to“gasoline ”inthecourse ofitsfindings.
6.4 Venezuela andBrazil claim thattheGasoline Rule violates thenational treatment
provisions ofArticle III:1 and4oftheGeneral Agreement andthemost-favoured-nation provision
ofArticle I.Venezuela claims inthealternative thattheGasoline Rule hasnullified andimpaired
benefits under thenon-violation provisions ofArticle XXIII:1(b). Venezuela andBrazil alsoclaim
thattheGasoline Rule violates Article 2oftheAgreement onTechnical Barriers toTrade (the
“TBT Agreement ”).TheUnited States rejects these claims andargues thattheGasoline Rule can
bejustified under theexceptions contained inArticle XX, paragraphs (b),(d)and(g),which
argument isrejected byVenezuela andBrazil. Italsoargues thattheGasoline Rule does not
come within thescope ofArticle 2oftheTBT Agreement.
B. Article III
1. Article III:4
6.5 ThePanel proceeded toexamine theclaim thattheGasoline Rule violates Article III:4 of
theGeneral Agreement, which states:
Theproducts oftheterritory ofanycontracting party imported intotheterritory of
anyother contracting party shall beaccorded treatment nolessfavourable than
thataccorded tolikeproducts ofnational origin inrespect ofalllaws, regulations
andrequirements affecting their internal 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 than tothe
likeproduct ofnational origin. ThePanel agreed with theparties thattheGasoline Rule wasa
law, regulation orrequirement affecting theinternal sale, offering forsale, purchase,
transportation, distribution oruseofanimported product. Itproceeded therefore toconsider
whether theGasoline Rule accorded lessfavourable treatment toimported products than tolike
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 than gasoline ofUSorigin. TheUnited States replied
thatgasoline from similarly-situated parties wastreated inthesame manner under theGasoline
Rule. Gasoline from importers wastreated nolessfavourably than thatfrom other domestic non-
refiners such asblenders, orrefiners who hadonly limited ornooperations in1990.
6.7 ThePanel observed thatArticle III:4 deals with treatment tobeaccorded tolikeproducts.
However, thetextdoes notspecify exhaustively those aspects thatdetermine whether theproducts
are“like”.Inresolving thisinterpretative issue thePanel referred, inconformity with Article 3.2
oftheUnderstanding onRules andProcedures Governing theSettlement ofDisputes, tothe
Vienna Convention ontheLaw ofTreaties ,which states inArticle 31that“atreaty shall beWT/DS2/R
Page 34
interpreted ingood faith inaccordance with theordinary meaning tobegiven totheterms ofthe
treaty intheir context andinthelight ofitsobject andpurpose ”.25
6.8 ThePanel proceeded toexamine thisissue inthelight oftheordinary meaning oftheterm
“like”.Itnoted thattheword canmean “similar ”,or“identical ”.ThePanel then examined the
practice oftheCONTRACTING PARTIES under theGeneral Agreement. This practice 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 been applied 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
theterm hadbeen achieved. TheWorking Party concluded thatproblems arising
from theinterpretation oftheterms should beexamined onacase-by-case basis.
This would allow afairassessment ineach case ofthedifferent 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 hadbeen applied bythepanel inthe1987 Japan Alcohol case intheexamination
under Article III:2 ofinternal taxation measures. That panel hadproceeded onacase-by-case
basis, determining whether various alcoholic beverages were “like”onthebasis of“their similar
properties, end-uses andusually uniform classification intariff nomenclatures. ”27ThePanel
considered thatthose criteria were alsoapplicable totheexamination oflikeproducts under
Article III:4.
6.9 Inlight oftheforegoing, thePanel proceeded toexamine whether imported anddomestic
gasoline were likeproducts under Article III:4. ThePanel observed first thattheUnited States
didnotargue thatimported gasoline anddomestic gasoline were notlikeperse.Ithadargued
rather thatwith respect 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 have exactly 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 next examined whether thetreatment accorded under theGasoline Rule to
imported gasoline waslessfavourable than thataccorded tolikegasoline ofnational origin. The
Panel observed thatdomestic gasoline benefitted ingeneral from thefactthattheseller who isa
refiner used anindividual baseline, while imported gasoline didnot. This resulted inless
favourable treatment totheimported product, asillustrated bythecase ofabatch ofimported
25Vienna Convention ontheLaw ofTreaties, 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 onthefirst dayofanannual period would require theimporter over therestofthe
period tosellonthewhole cleaner gasoline inorder toremain inconformity with theGasoline
Rule. Ontheother hand, saleofthechemically-identical batch ofdomestic gasoline onthefirst
dayofanannual period would notrequire adomestic refiner tosellonthewhole cleaner gasoline
over theperiod inorder toremain inconformity with theGasoline Rule. ThePanel alsonoted
thatthislessfavourable treatment ofimported gasoline induced thegasoline importer, inthecase
ofabatch ofimported gasoline notmeeting thestatutory baseline, toimport thatbatch atalower
price. This reflected thefactthattheimporter would have tomake costandprice allowances
because ofitsneed toimport other gasoline with which 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 sales conditions aswere afforded domestic gasoline
byanindividual baseline tiedtotheproducer ofaproduct, imported gasoline wastreated less
favourably than domestic gasoline.
6.11 ThePanel then examined theUSargument thattherequirements ofArticle III:4 aremet
because imported gasoline istreated similarly togasoline from similarly situated domestic parties
—domestic refiners with limited 1990 operations andblenders. According totheUnited States,
thedifference intreatment between imported anddomestic gasoline wasjustified because
importers, likedomestic refiners with limited 1990 operations andblenders, could notreliably
establish their 1990 gasoline quality, lacked consistent sources andquality ofgasoline, orhadthe
flexibility tomeet astatutory baseline since they were notconstrained byrefinery equipment and
crude supplies. ThePanel observed thatthedistinction intheGasoline Rule between refiners on
theonehand, andimporters andblenders ontheother, which affected thetreatment ofimported
gasoline with respect todomestic gasoline, wasrelated tocertain differences inthecharacteristics
ofrefiners, blenders andimporters, andthenature ofthedata held bythem. However, Article
III:4 oftheGeneral Agreement deals with thetreatment tobeaccorded tolikeproducts; its
wording does notallow lessfavourable treatment dependent onthecharacteristics oftheproducer
andthenature ofthedata held byit.ThePanel noted thatintheMalt Beverages case, atax
regulation according lessfavourable treatment tobeer onthebasis ofthesizeoftheproducer was
rejected.29Although thisfinding wasmade under Article III:2 concerning fiscal measures, the
Panel considered thatthesame principle applied toregulations under Article III:4. Accordingly,
thePanel rejected theUSargument thattherequirements ofArticle III:4 aremetbecause 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:4 inthismanner would mean thatthetreatment ofimported and
domestic goods concerned could nolonger beassured ontheobjective basis oftheir likeness as
products. Rather, imported goods would beexposed toahighly subjective andvariable treatment
according toextraneous factors. This would thereby create great instability anduncertainty inthe
conditions ofcompetition asbetween domestic andimported goods inamanner fundamentally
inconsistent with theobject andpurpose ofArticle III.
28"United States -Section 337 oftheTariff Actof1930", BISD 36S/386, para 5.11 (adopted on7November 1989).
29"United States -Measures Affecting Alcoholic andMalt Beverages", BISD 39S/206, para. 5.19 (adopted on19June 1992).WT/DS2/R
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6.13 ThePanel considered thattheforegoing wassufficient todispose oftheUSargument. It
noted, however, thateven iftheUSapproach were tobefollowed, under anyapproach based on
“similarly situated parties ”thecomparison could justasreadily focus onwhether imported
gasoline from anidentifiable foreign refiner wastreated more orlessfavourably than gasoline
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 Rule treated theproducts of
these refineries differently byallowing only gasoline produced bythedomestic entity tobenefit
from theadvantages ofanindividual baseline. This consequential uncertainty andindeterminacy
ofthebasis oftreatment underlined, intheview ofthePanel, therationale ofremaining within
theterms oftheclear language, object andpurpose ofArticle III:4 asoutlined above in
paragraph 6.12.
6.14 ThePanel then noted theargument oftheUnited States thatthetreatment accorded to
gasoline imported under astatutory baseline wasonthewhole nolessfavourable than that
accorded todomestic gasoline under individual refiner baselines. TheUnited States claimed that
theGasoline Rule didnotdiscriminate against imported gasoline, since thestatutory baseline (by
thenature ofitscalculation) andtheaverage ofthesum oftheindividual 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. This amounted 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:4 hastobe
understood asapplicable toeach individual case ofimported 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 lead to
great uncertainty about theconditions ofcompetition between imported and
domestic products andthus defeat thepurposes ofArticle III.30
ThePanel concurred with thisreasoning thatunder Article III:4 lessfavourable 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 even from thepoint ofview ofimported gasoline asa
whole, treatment wasgenerally lessfavourable. Importers ofgasoline hadtoadapt toanassigned
average standard notlinked totheparticular gasoline imported, while refiners ofdomestic gasoline
hadonly tomeet astandard linked totheir own product in1990. Statistics onbaselines bore out
thisdifference intreatment. According totheUnited States, asofAugust 1995, approximately
30"United States -Section 337 oftheTariff Actof1930", BISD 36S/345, para. 5.14 (adopted on7November 1989).WT/DS2/R
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100USrefiners, representing 98.5 percent ofgasoline produced in1990, hadreceived EPA
approval oftheir individual baselines. Only three oftherefiners metthestatutory baseline forall
parameters. Thus, while 97percent ofUSrefiners didnotandwere notrequired tomeet the
statutory baseline, thestatutory baseline wasrequired ofimporters ofgasoline, except intherare
case (according totheparties) thatthey could 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 sales conditions aswere afforded domestic gasoline byan
individual baseline tiedtotheproducer ofaproduct, imported gasoline wastreated lessfavourably
than domestic gasoline.
2. Article III:1
6.17 ThePanel then noted thearguments advanced byVenezuela andBrazil thattheGasoline
Rule wasapplied “soastoafford protection todomestic production ”contrary toArticle III:1.
TheUnited States disagreed andargued inthealternative thatArticle III:1 wasonly hortatory and
could notform thebasis ofaviolation. ThePanel examined first whether, after making afinding
ofinconsistency with Article III:4, itshould make afinding under Article III:1. ThePanel noted
thatthepanel intheMalt Beverages case hadexamined aclaim made under paragraphs 1,2and4
ofArticle III. That panel hadconcluded that“because Article III:1 isamore general provision
than either Article III:2 orIII:4, itwould notbeappropriate forthePanel toconsider [the
complainant ’s]Article III:1 allegations totheextent thatthePanel were tofind[therespondent ’s]
measures tobeinconsistent with themore specific provisions ofArticles III:2 andIII:4. ”31The
present Panel agreed with thisreasoning, andtherefore didnotfinditnecessary toexamine the
consistency oftheGasoline Rule with Article 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 thatithadnotbeen theusual practice ofapanel established under the
General Agreement toruleonmeasures that, atthetime thepanel ’sterms ofreference were fixed,
were notandwould notbecome effective. Inthe1978 Animal Feed Protein case, thePanel ruled
onadiscontinued measure, butonethathadterminated after agreement 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 andMalt Beverages", BISD 39S/206, 270, para. 5.2(adopted on19June 1992).
32"EEC -Measures onAnimal Feed Proteins", L/4599, BISD 25S/49 (adopted on14March 1978). Seealso theReport ofthePanel
on"United States -Prohibitions ofImports ofTuna and Tuna 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 after the75percent rulehadceased tohave anyeffect, 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:4 andXX(b),(d)and(g)would inanycase
have made unnecessary theexamination ofthe75percent ruleunder Article I:1. ThePanel did
nottherefore proceed toexamine thisaspect oftheGasoline Rule under Article I:1oftheGeneral
Agreement.
D. Article XX(b)
6.20 ThePanel proceeded toexamine whether theaspect ofthebaseline establishment methods
found inconsistent with Article III:4 could, asargued bytheUnited States, bejustified under
paragraph (b)ofArticle XX. Therelevant parts ofArticle XXwere asfollows:
Subject totherequirement thatsuch measures arenotapplied inamanner which
would constitute ameans ofarbitrary orunjustifiable discrimination between
countries where thesame conditions prevail, oradisguised restriction on
international trade, nothing inthisAgreement shall beconstrued toprevent the
adoption orenforcement byanycontracting party ofmeasures:
(b) necessary toprotect human, animal orplant lifeorhealth;
ThePanel noted thatastheparty invoking anexception theUnited States bore theburden 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 with therequirements ofthe
introductory clause ofArticle XX.
Inorder tojustify theapplication ofArticle XX(b), alltheabove elements hadtobesatisfied.
1. Policy goal ofprotecting human, animal orplant lifeorhealth
6.21 ThePanel noted theUnited States argument thatairpollution, inparticular ground-level
ozone andtoxic substances, presented health risks tohumans, animals andplants. TheUnited
States argued that, since about one-half ofsuch pollution wascaused byvehicle emissions, andthe
Gasoline Rule reduced these, theGasoline Rule waswithin therange ofpolicy goals described in
Article XX(b). Venezuela andBrazil didnotdisagree with thisview. ThePanel agreed with the
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
Page 39
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 6.16 thatimported gasoline wastreated less
favourably than domestic gasoline, since, under thebaseline establishment methods, imported
gasoline wasprevented from benefitting from asfavourable sales conditions aswere afforded
domestic gasoline byanindividual baseline tiedtotheproducer ofaproduct. ThePanel then
proceeded toexamine whether theaspect oftheGasoline Rule found inconsistent with theGeneral
Agreement wasnecessary toachieve thestated policy objectives under Article XX(b). ThePanel
noted thatitwasnotthenecessity ofthepolicy goal thatwastobeexamined, butwhether ornot
itwasnecessary thatimported gasoline beeffectively prevented from benefitting from as
favourable sales conditions aswere afforded byanindividual baseline tiedtotheproducer ofa
product. ItwasthetaskofthePanel toaddress whether these inconsistent measures were
necessary toachieve thepolicy goal under Article XX(b). Itwastherefore notthetaskofthe
Panel toexamine thenecessity oftheenvironmental objectives oftheGasoline Rule, orofparts of
theRule thatthePanel didnotspecifically findtobeinconsistent with theGeneral Agreement.
6.23 ThePanel then turned tothearguments oftheparties relating tothataspect ofthe
Gasoline Rule found inconsistent with theGeneral Agreement. TheUnited States argued thatnot
allentities dealing ingasoline could beassigned anindividual baseline and, ofthose who could be
assigned such abaseline, notallcould usethesame types ofsecondary ortertiary evidence
(Methods 2and3)toestablish it.Certain entities including importers, blenders andrefiners
which didnothave continuous 1990 operations, were simply notinaposition tofurnish this
secondary ortertiary evidence. Venezuela andBrazil argued ontheother hand thatforeign
refiners should beaccorded their own individual baselines under theGasoline Rule using thesame
types ofevidence, aseasily available tothem astodomestic refiners. Alternatively, they argued
thatimporters should beable touseindividual 1990 baselines established fortheforeign refiners
with whom they dealt. They noted thatanEPA regulatory proposal hadeven been made along
those lines inMay 1994. TheUnited States countered thatsuch aproposal would notbefeasible
because of:(1)theimpossibility ofdetermining therefinery oforigin foreach imported
shipment; (2)theincentive to“game ”thesystem thereby handed toexporters andimporters; and
(3)thedifficulty fortheUnited States toexercise anenforcement jurisdiction with respect toa
foreign refinery, since theGasoline Rule required criminal andcivil sanctions inorder tobe
effective. TheUnited States argued further against theuseofforeign refiner baselines byciting
“equity concerns ”ofimporters thattheir usewould favour those firms thatdealt with Venezuelan
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:4 were necessary toachieve thestated policy
objectives oftheUnited States. ThePanel noted thattheterm “necessary ”hadbeen interpreted in
thecontext ofArticle XX(d) bythepanel intheSection 337case which hadstated that:
acontracting party cannot justify ameasure inconsistent with another GATT
provision as"necessary" interms ofArticle XX(d) ifanalternative measure which
itcould reasonably beexpected toemploy andwhich isnotinconsistent with other
GATT provisions isavailable toit.Bythesame token, incases where ameasure
consistent with other GATT provisions isnotreasonably available, acontractingWT/DS2/R
Page 40
party isbound touse, among themeasures reasonably available toit,thatwhich
entails theleast degree ofinconsistency with other GATT provisions.34
Thesame reasoning hadbeen adopted bythe1990 Thai Cigarette panel inexamining ameasure
under Article XX(b). That panel 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) only ifthere were noalternative measures consistent
with theGeneral Agreement, orlessinconsistent with it,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 andfully consistent with theGeneral
Agreement, they hadalsoinother instances identified alternative measures thatwould be“less
inconsistent ”with theGeneral Agreement. Forexample, thepanel inthe337case found that,
while ageneral exclusion order applying toimported products wasnot“necessary ”,alimited in
remorder could bejustified even though ittoowasinconsistent with Article III:4.36Recalling its
remarks inparagraph 6.22 above, thePanel considered thatitstaskwasthus todetermine whether
theUnited States haddemonstrated whether itwasnecessary tomaintain precisely those
inconsistent measures whereby imported gasoline waseffectively prevented from benefitting from
asfavourable sales conditions aswere afforded todomestic gasoline byanindividual baseline tied
totheproducer ofaproduct. Ifthere were consistent orlessinconsistent measures reasonably
available totheUnited States, therequirement todemonstrate necessity would nothave been met.
6.25 ThePanel then examined 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 sales conditions aswere afforded todomestic gasoline byanindividual baseline tiedto
theproducer ofaproduct wasnecessary toachieve thestated goals oftheGasoline Rule. Inthe
view ofthePanel, baseline establishment methods could beapplied toentities dealing inimported
gasoline inaway thatgranted treatment toimported gasoline thatwasconsistent orless
inconsistent with theGeneral Agreement. Ifasingle statutory baseline applying toallentities —
refiners, blenders andimporters —wasnotthechosen regulatory method, then importers could
forexample bepermitted touseagasoline baseline applicable toimports derived, when possible,
from evidence oftheindividual 1990 baselines offoreign refiners with whom theimporter
currently dealt. Although such ascheme could result informally different regulation forimported
anddomestic products, thePanel noted thatprevious panels hadaccepted thatthiscould be
consistent with Article III:4.37Therequirement under Article III:4 totreat animported product
nolessfavourably than thelikedomestic product ismetbygranting formally different treatment
totheimported product, ifthattreatment results inmaintaining conditions ofcompetition forthe
imported product nolessfavourable than those ofthelikedomestic product. Further, these
conditions ofcompetition referred tothose conditions thatwere established bygovernment
measures andwould nottherefore include factors such asthe“flexibility ofindividual producers ”
inthiscase. ThePanel noted finally thataregulatory scheme using foreign refiner baselines, to
34"United States -Section 337 oftheTariff Actof1930", BISD 36S/345, para. 5.26 (adopted on7November 1989).
35"Thailand -Restrictions onImportation ofandInternal Taxes onCigarettes", BISD 37S/200, para. 75(adopted on7November 1990).
36"United States -Section 337 oftheTariff Actof1930", BISD 36S/345, para. 5.32 (adopted on7November 1989).
37"United States -Section 337 oftheTariff Actof1930", BISD 36S/345, para. 5.11 (adopted on7November 1989).WT/DS2/R
Page 41
theextent thatitdidnotdistinguish between imported gasoline onthebasis ofitscountry of
origin, would notnecessarily contravene Article Iorother provisions oftheGeneral Agreement,
andthattheUnited States, notwithstanding suggestions thatcertain importers might have equitable
concerns, hadnotestablished thecontrary.
6.26 ThePanel noted theclaims oftheUnited States thatallowing importers orforeign refiners
touseindividual baselines insuch away wasnotfeasible 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, with obligations
under Article III:4. First, while thePanel agreed thatitwould benecessary under such asystem
toascertain theorigin ofgasoline, thePanel could notconclude thattheUnited States hadshown
thatthiscould notbeachieved byother measures reasonably available toitandconsistent orless
inconsistent with theGeneral Agreement. Indeed, thePanel noted thatadetermination oforigin
would often befeasible. ThePanel examined, forinstance, thecase ofadirect shipment tothe
United States. Itconsidered thatthere wasnoreason tobelieve that, given theusual measures
available ininternational trade fordetermination oforigin andtracking ofgoods (including
documentary evidence andthird party 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 with Article
III:4 resulting from thebaseline establishment methods. Itwasuncertain if,ortowhat extent,
gaming would actually occur, especially given thesmall market share ofimported gasoline
(approximately 3percent). Moreover, thePanel noted thattheGasoline Rule didnotguarantee 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 their relative share ofproduction of
reformulated gasoline, thenational average level ofpollutants subject tothenon-degradation
requirements would begreater than in1990. 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 Rule permitted some refiners toproduce dirtier gasoline than they produced in1990
(e.g., certain producers ofJP-4 jetfuel) andpermitted others torequest specific derogation from
theRule. ThePanel stressed thatitwasnotfinding thatsuch events would occur, only thatthey
could under theRule. Given thattheGasoline Rule didnottherefore 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 onitsown domestic production. Moreover, slightly stricter overall requirements
applied toboth domestic andimported gasoline could offset anypossibility ofanadverse
environmental effect from these causes, andallow theUnited States toachieve itsdesired level of
clean airwithout discriminating against imported gasoline. Such requirements could be
implemented bytheUnited States atanytime. ThePanel concluded thattheUnited States hadnot
metitsburden ofshowing thatconcern over gaming wasanadequate justification formaintaining
theinconsistency with Article III:4 resulting from thebaseline establishment methods.
6.28 Third, thePanel didnotaccept thattheUnited States haddemonstrated thatthere wasno
other measure consistent, orlessinconsistent, with Article III:4 reasonably available toenforce
compliance with foreign refiner baselines, orimporter baselines based thereon. Theimposition of
penalties onimporters wasinthePanel ’sview aneffective enforcement mechanism used bytheWT/DS2/R
Page 42
United States inother settings. Intheview ofthePanel, theUnited States hadreasonably
available toitdata for,andmeasures of,verification andassessment which were consistent orless
inconsistent with Article III:4. Forinstance, although foreign data may beformally lesssubject to
complete control byUSauthorities, thisdidnotamount toestablishing thatforeign data could not
inanycircumstances besufficiently reliable toserve USpurposes. This, however, wasthe
practical effect oftheapplication oftheGasoline Rule. InthePanel 'sview, theUnited States had
notdemonstrated thatdata available from foreign refiners wasinherently lesssusceptible to
established techniques ofchecking, verification, assessment andenforcement than data forother
trade ingoods subject toUSregulation. Thenature ofthedata inthiscase wassimilar todata
relied upon bytheUnited States inother contexts, including, forexample, under theapplication
ofantidumping laws. Inanantidumping case, only when theinformation wasnotsupplied or
deemed unverifiable didtheUnited States turn toother information. Ifasimilar practice were to
beapplied inthecase oftheGasoline Rule, then importers could, forinstance, bepermitted touse
theindividual baselines offoreign refiners forimported gasoline from those refiners, with the
statutory baseline being applied only when thesource ofimported gasoline could notbe
determined orabaseline could notbeestablished because ofanabsence ofdata. InthePanel 's
view, because allowing forsuch apossibility wasreasonably available totheUnited States and
would entail alesser degree ofinconsistency with theGeneral Agreement, theUnited States had
failed todemonstrate thenecessity oftheGasoline Rule'sinconsistency with Article III:4 onthis
matter.
6.29 Inview ofthePanel ’sfinding thattheaspect ofthebaseline establishment methods found
inconsistent with Article III:4 wasnot“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 with Article III:4 could, asargued bytheUnited States, bejustified under
paragraph (d)ofArticle XX. Therelevant parts ofArticle XXwere asfollows:
Subject totherequirement thatsuch measures arenotapplied inamanner which
would constitute ameans ofarbitrary orunjustifiable discrimination between
countries where thesame conditions prevail, oradisguised restriction on
international trade, nothing inthisAgreement shall beconstrued toprevent the
adoption orenforcement byanycontracting party ofmeasures:
(d) necessary tosecure compliance with laws orregulations which arenot
inconsistent with theprovisions 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 XXbore theburden
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 with theGeneral Agreement -secure
compliance with laws orregulations themselves notinconsistent with theGeneral
Agreement;WT/DS2/R
Page 43
(2) thattheinconsistent measures forwhich theexception wasbeing invoked were
necessary tosecure compliance with those laws orregulations; and
(3) thatthemeasures were applied inconformity with therequirements ofthe
introductory clause ofArticle XX.
Inorder tojustify theapplication ofArticle XX(d), alltheabove elements hadtobesatisfied.
1. Securing compliance with consistent laws orregulations
6.32 ThePanel proceeded toexamine whether theaspect ofthebaseline establishment methods
found inconsistent with theGeneral Agreement secured compliance with alaworregulation not
inconsistent with theGeneral Agreement. TheUnited States argued thatthenon-degradation
requirements were laws andregulations notinconsistent with theGeneral Agreement, andthatthe
baseline establishment methods secured compliance with these. Venezuela argued thattheUnited
States hadnotclearly established which laws orregulations were notinconsistent with theGeneral
Agreement, andwith which 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 ”with theGeneral Agreement. However, thePanel found that
maintenance ofdiscrimination between imported anddomestic gasoline contrary toArticle III:4
under thebaseline establishment methods didnot“secure compliance ”with thebaseline system.
These methods were notanenforcement mechanism. They were simply rules fordetermining the
individual baselines. Assuch, they were notthetype ofmeasures with which Article XX(d) was
concerned.38
2. Other conditions
6.34 ThePanel observed that, inview ofitsfinding thatthelessfavourable treatment of
imported gasoline under thebaseline establishment methods accorded toimporters didnot“secure
compliance ”with theunderlying baseline establishment rules, itdidnotneed toconsider 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 Rule found inconsistent
with Article III:4 could, asargued bytheUnited States, bejustified under paragraph (g)of
Article XX. Therelevant parts ofArticle XXwere asfollows:
Subject totherequirement thatsuch measures arenotapplied inamanner which
would constitute ameans ofarbitrary orunjustifiable discrimination between
countries where thesame conditions prevail, oradisguised restriction on
international trade, nothing inthisAgreement shall beconstrued toprevent the
adoption orenforcement byanycontracting party ofmeasures:
38"European Economic Community -Regulation onImports ofParts andComponents", BISD 37S/132, paras. 5.12 -5.18 (adopted
on16May 1990).WT/DS2/R
Page 44
(g) relating totheconservation ofexhaustible natural resources ifsuch
measures aremade effective inconjunction with restrictions ondomestic
production orconsumption;
ThePanel noted thatastheparty invoking anexception theUnited States bore theburden 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 with theGeneral Agreement -were related
totheconservation ofexhaustible natural resources;
(3) thatthemeasures forwhich theexception wasbeing invoked were made effective
inconjunction with restrictions ondomestic production orconsumption; and
(4) thatthemeasures were applied inconformity with therequirements ofthe
introductory clause ofArticle XX.
Inorder tojustify theapplication ofArticle XX(g), alltheabove elements hadtobesatisfied.
1. Policy goal ofconserving anexhaustible natural resource
6.36 ThePanel noted theUSargument thatclean airwasanexhaustible resource within the
meaning ofArticle XX(g), since itcould beexhausted bypollutants such asthose 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 such aspetroleum andcoal; toexpand ittocover “conditions ”ofrenewable
resources wasnotjustified.
6.37 ThePanel then examined whether clean aircould beconsidered anexhaustible natural
resource. Intheview ofthePanel, clean airwasaresource (ithadvalue) anditwasnatural. It
could bedepleted. Thefactthatthedepleted resource wasdefined with respect 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, para 4.4(adopted on22March 1988).
Seealso thesame conclusion with respect todolphins intheReport ofthePanel on"United States -Restrictions onImports ofTuna", circulated
on16June 1994, DS29/R, para 5.13, notadopted.WT/DS2/R
Page 45
2. Measures “related to”theconservation ofanexhaustible natural
resource; andmade effective “inconjunction ”with restrictions on
domestic production orconsumption
6.38 ThePanel proceeded toexamine whether thebaseline establishment methods found
inconsistent with Article III:4 were “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
own conservation objectives, andthemeasure could nottherefore beseen as“primarily aimed ”at
conservation.
6.39 ThePanel noted thatthewords “related to”didnotinisolation provide precise guidance
astotherequired linkbetween themeasures andtheconservation objective. However, thePanel
agreed with theinterpretation ofthisterm inthereport 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 didnothave tobenecessary 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 intheview ofthePanel only beconsidered tobemade effective
"inconjunction with" production restrictions ifitwasprimarily aimed atrendering
effective these restrictions.41(emphasis added)
6.40 ThePanel then proceeded toexamine whether thebaseline establishment methods could be
saidtobe"primarily aimed at"achieving theconservation objectives oftheGasoline Rule. The
Panel recalled thepurpose ofArticle XX:(g), which hadbeen expressed bythepanel inthe1987
Herring andSalmon case asfollows:
[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 then considered whether theprecise aspects oftheGasoline Rule thatithadfound 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, para 4.6(adopted on22March 1988).
41Ibidem.WT/DS2/R
Page 46
natural resources. ThePanel sawnodirect connection between lessfavourable treatment of
imported gasoline thatwaschemically identical todomestic gasoline, andtheUSobjective of
improving airquality intheUnited States. Indeed, intheview ofthePanel, being consistent with
theobligation toprovide nolessfavourable treatment would notprevent theattainment ofthe
desired level ofconservation 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 lack ofconnection wasunderscored bythefactthataffording treatment of
imported gasoline consistent with itsArticle III:4 obligations would notinanyway hinder 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
case were 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, inlight ofitsfinding inparagraph
6.40, thePanel didnotproceed todetermine thisissue orwhether themeasure mettheconditions
intheintroductory clause ofArticle XX.
G. Article XXIII:1(b)
6.42 ThePanel then noted theclaim byVenezuela under Article XXIII:1(b) thatbenefits
accruing toitunder theGeneral Agreement hadbeen nullified andimpaired bytheapplication of
theGasoline Rule, whether ornotitconflicted with provisions oftheGeneral Agreement. In
view ofthefinding bythePanel thattheGasoline Rule violated Article III:4 oftheGeneral
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 Inview ofitsfindings under theGeneral Agreement, thePanel concluded thatitwasnot
necessary todecide onissues raised under theTBT Agreement.
VII. CONCLUDING REMARKS
7.1 Inconcluding, thePanel wished tounderline thatitwasnotitstasktoexamine generally
thedesirability ornecessity oftheenvironmental objectives oftheClean AirActortheGasoline
Rule. Itsexamination wasconfined tothose aspects oftheGasoline Rule thathadbeen raised by
thecomplainants under specific provisions oftheGeneral Agreement. Under theGeneral
Agreement, WTO Members were freetosettheir own environmental objectives, butthey were
bound toimplement these objectives through measures consistent with itsprovisions, notably those
ontherelative treatment ofdomestic andimported products.WT/DS2/R
Page 47
VIII. CONCLUSIONS
8.1 Inthelight ofthefindings above, thePanel concluded thatthebaseline establishment
methods contained inPart 80ofTitle 40oftheCode ofFederal Regulations arenotconsistent
with Article III:4 oftheGeneral Agreement, andcannot bejustified under paragraphs (b),(d)and
(g)ofArticle XXoftheGeneral Agreement.
8.2 ThePanel recommends thattheDispute Settlement Body request theUnited States tobring
thispartoftheGasoline Rule intoconformity with itsobligations under theGeneral Agreement.