Government Procurement under GATT: The Fallouts of a Narrow Interpretation

I.               Introduction

Article III of the General Agreement on Tariffs and Trade [“GATT”] lays down, in simple terms, the general principle of how a county’s measure cannot be implemented in a manner that it affords protection to domestic products in the market as opposed to foreign or imported products.[1] Such an obligation casted on member states signatories to WTO and GATT is known as the National Treatment Obligation [“NTO”] For example, if imported mobile equipments are taxed higher in India, as compared to domestic mobile equipment, India’s measure mandating such treatment are in violation Article III:2 of GATT.[2]

The very same article, however, lays down certain exceptions to the NTO. One of the exceptions is provided under Article III:8(a) of GATT which is also known as the Government Procurement exception. This blog aims to understand the fallacies surrounding the interpretation given to this provision by the Appellate Body [“AB”] of the WTO.

II.            Understanding Article III:8(a) of GATT

Article III:8(a) reads as follows:

“The provisions of this Article shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale.”[3]

Use of the words “provisions of this Article shall not apply” implies that there an exception to the NTO obligation that a country undertakes as a signatory to WTO and GATT, unless the members are also signatories to the Government Procurement Agreement.[4]  It was not until 2013, when the AB had laid down a certain interpretation of the provision, which is the centre of discussion of this article.

a.     The Facts surrounding Canada – Renewable Energy

The Panel and the AB in Canada – Renewable Energy[5] was tasked to interpret Article III:8(a) of GATT for the very first time. The dispute pertained to the FIT programme initiated in Canada which required private entities to acquire generator equipment of electricity and were also paid a guaranteed price under 20-40-year contracts, for which minimum domestic content levels for energy generation equipment had to be fulfilled. The government procured the electricity generated by these private entities under this programme. When a complaint was filed before the WTO alleging that the programme violated Article III:4 of GATT, Canada attempted to justify it under Article III:8(a).

b.     The Panel and Appellate Body’s Interpretation

The Panel and the AB firstly held that the provision has to be read as a whole, and every word in the article entailed a relationship with one another, and the article needed a reading with other clauses under Article III of GATT.[6] For instance, the word “procurement” relates to the term “product”, and such a “product”, as mentioned under Article III:8(a), is procured by the way of a “purchase” by “governmental agencies” for a “governmental purpose”. Although these terms are dispersed across the article’s text, they are to be read alongside each other; and further, the “product” concerning Article III:8(a) of GATT needed a relationship with the “product” concerning violation of a clause under Article III of GATT.

This establishes that the article attracts laws, regulations or requirements [the measure concerning violation of WTO law] which concern procurement of products [by the way of purchasing them] by governmental agencies for governmental purpose(s). Finally, all this must be done “not with a view to commercial resale or with a view to use in the production of goods for commercial sale”.[7]

We must now correlate the interpretation of this provision with the facts of the case as mentioned above. Considering that the government in the present case was procuring electricity, and the private entities generating electricity were purchasing the equipment for generating such electricity, the Panel and AB came out with two divergent opinions. Although this assessment is confined to the facts of the aforementioned case, they are relevant in order to understand the fallouts of the interpretation given to Article III:8(a) by the AB, which are to be seen in a general sense.

The Panel held the exception to be applicable as there was a “close relationship” with the product being procured by the private generators (the electricity generating equipment) and the government (the electricity).[8] This, however, was not accepted by the AB when the same was appealed.[9] The AB stated that the measure being justified under Article III:8(a) must be concerned with “governing” of products purchased by governmental agencies for a governmental purpose.[10] Since the measure in the present case concerned the purchase of electricity generating equipment, and the product being purchased by the governmental agency was the electricity generated by such equipment, they were not in a competitive relationship with each other.[11] The AB set this competitive relationship standard primarily because they considered Article III:8(a) to be read along with the clauses of Article III which is/are in violation.

Thus, the AB held that the measure could not be justified under Article III:8(a) since the product concerning violation of Article III and the one being procurement by the governmental agency (as being justified under Article III:8(a)) are not in a competitive relationship with each other. However, the AB left the question of whether inputs and processes of production used to produce the “product” concerning Article III:8(a) could be considered within its language or not. Finally, the AB in India – Solar Cells held that although “a consideration of inputs and processes of production may inform the question of whether the product purchased is in a competitive relationship with the product being discriminated against, it does not displace the competitive relationship standard”, meaning thereby, that the question of inputs and processes will only arise when the products concerning violation of Article III and those being justified under Article III:8(a) are in a competitive relationship.[12] Thus, the AB has adamantly stuck to its interpretation – that the product concerning violation of Article III and the product concerning justification, for such violation, under Article III:8(a) were to be in a competitive relationship with each other in a given market.[13]

III.          The Inherent fallacies

Although the AB’s interpretation seems to be sound in its application, it has certain consequences. Firstly, it severely narrows down the scope of the government procurement exception under GATT. Secondly, although Article III:8(a) must be read alongside other clauses under Article III of GATT, the interpretation overlooks the notion of legitimate state interest. It is pertinent to note that the negotiations of GATT, 1947 revolved and pertained to two primary interests: 1) trade liberalisation in the global trade and economic sphere, and 2) legitimate state aims such as full employment and domestic market development – both of which have been incorporated within the framework of GATT so as to maintain harmony between the two interest so far as international trade law is concerned.[14] Even if we are to assume that not all state interests being justified under Article III:8(a) are legitimate, narrowing down the scope of its application will overlook legitimate attempts by members of WTO. The AB itself has gone on to say that an interpretation to a WTO Agreement is ultimately a holistic exercise that should not be mechanically subdivided into rigid components,[15] and the interpretation should be in furtherance of the object of the agreement and in accordance with the principles of good faith as per the customary rules of public international law.[16] Providing such a rigid standard of interpretation to the Article III:8(a) ignores the delicate balance between the two interests nested in GATT.

Thirdly, even if the measure attracting violation of a substantive clause under Article III of GATT affords protection to domestic products as opposed to imported products, if there exists a sufficient nexus between the product procured and the ‘governmental purpose’, being justified under Article III:8(a), it would be absurd for the Panels or the AB to find a competitive relationship between the product being discriminated against and the product being procured by the governmental agencies for governmental purposes. Such an interpretation will lead to Panels and the AB compromising on legitimate state interest in order to uphold the principles of trade liberalisation – as government procurement is an exception somewhere fulfils such legitimate state aims. By reading the “product” concerning violation of any clause under Article III to be in a mandatory competitive relationship with the “product” concerning Article III:8(a), as per the AB’s standard, will limit a WTO member’s ability to procure products for governmental purposes and at the same time justify the concerned measure under Article III:8(a) of GATT.

For such reasons, the AB’s interpretation of Article III:8(a) of GATT is imprudent.

IV.          Conclusion

It is humbly submitted that the AB’s reasoning ought to be relooked as it confined the scope of Article III:8(a)’s interpretation into an extremely narrow sphere and overlooks the negotiating history of GATT. The Panel’s interpretation in Canada – Renewable Energy is comparatively consistent with the negotiating history and intent behind the government procurement exception. Considering that Appellate Body Reports and Panel Reports are only binding on the member nations party to a dispute,[17] future reports must cautiously relook the interpretation surrounding government procurement under Article III of GATT.

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REFERENCES

[1] Appellate Body Report, Canada – Certain Measures Concerning Periodicals, WTO Doc. WT/DS31/AB/R 18 (adopted 30 July 1997).

[2] Article III:2 of GATT obligates WTO members to not subject imported or foreign products, “directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products”. General Agreement on Tariffs and Trade 1994, art. III:2 Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994) [hereinafter “GATT”].

[3] GATT, art. III:8(a).

[4] This is so because members of WTO who are signatories to the plurilateral agreement of Government Procurement cannot justify the violation of their NTO under Article III of GATT under Article III:8(a) of GATT. See Articles III, VIII of Agreement on Government Agreement.

[5] Appellate Body Report, Canada – Certain Measures Affecting the Renewable Energy Generation Sector / Canada – Measures Relating to the Feed-in Tariff Program, WTO Doc. WT/DS412/AB/R / WT/DS426/AB/R (adopted 24 May 2013) [hereinafter “Appellate Body Report, Canada – Renewable Energy”]; Panel Reports, Canada – Certain Measures Affecting the Renewable Energy Generation Sector / Canada – Measures Relating to the Feed-in Tariff Program, WTO Docs. WT/DS412/R and Add.1 / WT/DS426/R and Add.1, (adopted 24 May 2013) [hereinafter “Panel Report, Canada – Renewable Energy”].

[6] Appellate Body Report, Canada – Renewable Energy, id at ¶ 5.57.

[7] GATT, art. III:8(a); Id at ¶ 5.70.

[8] Panel Report, Canada – Renewable Energy, supra note 5, at ¶ 7.127.

[9] Appellate Body Report, Canada – Renewable Energy, supra note 5, at ¶ 5.78.

[10] Id.

[11] Id. at ¶ 5.79.

[12] Appellate Body Report, India – Certain Measures Relating to Solar Cells and Solar Modules, WTO Doc. WT/DS456/AB/R and Add.1 ¶ 5.40 (adopted 14 October 2016).

[13] For example, two chocolate bars manufactured by different producers will be in a competitive relationship with each other in a given market. However, a chocolate bar and plastic wrappers for covering such chocolate bars can never be in a competitive relationship, even if they are in a close relationship with each other.

[14] Autar Kishan Kaul, Guide to the WTO and GATT: Economics, Law and Politics 22 (2010).

[15] Appellate Body Report, European Communities – Customs Classification of Frozen Boneless Chicken Cuts, WTO Doc. WT/DS269, 286/AB/R ¶ 176 (adopted 27 September 2005).

[16] See Vienna Convention on the Law of Treaties, art. 31, 32 – 1155 U.N.T.S. 331, 8 I.L.M. 679, entered into force Jan. 27, 1980; Dispute Settlement Rules: Understanding on Rules and Procedures Governing the Settlement of Disputes, art. 3.2, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401, 33 I.L.M. 1226 (1994) [hereinafter “DSU”].

[17] DSU, art. 26, 19.

ABOUT THE AUTHOR

Ashwin Vardarajan is an undergraduate law student at Symbiosis Law College, Pune.

In Content Picture Credit: Startfor Worldview