Bridges Weekly Trade News Digest • Volume 11 • Number 22 • 20th June 2007
Brazil Loses Retreaded Tyres Dispute, But Happy With Panel’s Mixed Ruling
Brazil has lost a WTO challenge against its import restrictions on retreaded tyres. The EU had contended that the import limitations were motivated by a desire to protect the local tyre industry rather than to pursue genuine public health objectives. The dispute settlement panel’s report, released on 12 June, confirmed a confidential interim ruling (see BRIDGES Weekly, 14 March 2007, http://www.ictsd.org/weekly/07-03-14/story2.htm).
Despite the panel’s call for it to change its policies, the Brazilian government welcomed the decision. Officials noted that the panel had accepted the health- and environment-related justifications for restrictions on the import and stockpiling of used and retreaded tyres, objecting only to the way in which the measures were applied.
Indeed, some trade lawyers expressed surprise at the extent to which the panel agreed with Brasilia’s arguments and left the door open for it to maintain many of the limitations with only minor modifications.
The case, which represents the first-ever challenge against trade restrictions imposed by a developing country for health and environmental reasons, has been closely watched by environmental groups.
Panel agrees that restrictions are justifiable…
The panel ruled that Brazil’s restrictions were justifiable under GATT Article XX(b), which allows governments to limit trade when necessary in order to protect human, animal, or plant life and health.
It agreed with Brazil’s argument that retreaded tyres - used tyres that are reprocessed for a second and final use - had a shorter life span than new ones and therefore contributed to a faster accumulation of waste tyres. These growing piles of waste tyres in turn provide fertile breeding grounds for disease-carrying mosquitoes, and their sheer volume is already beyond the country’s capacity for environmentally responsible disposal, the panel accepted. It also agreed that the risk of dengue, yellow fever, and malaria increased in proportion to the accumulation and transport of waste tyres. Notably, the panel found that, although proper management could significantly offset these risks, the ‘reality’ in Brazil meant that this was unlikely to occur to the extent necessary to meet the government’s health objectives. In sum, it said that the import restrictions and associated fines were necessary to meet the public health goals.
The three members of the dispute panel did not, however, closely examine the EU’s complaint that certain low-quality new tyres unsuitable for retreading were exempt from the import ban, even though they became waste as quickly as retreaded tyres.
…but their application was discriminatory
Although the panel admitted that the restrictions might have been motivated by health and environmental considerations - and that there were no clear alternatives — it concluded that the way the measures were applied amounted to an unjustified and discriminatory restriction of trade. The so-called ‘chapeau’, or introductory paragraph, of GATT Article XX specifies that restrictions otherwise prohibited by WTO rules are only permitted if they "are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination… or a disguised restriction on international trade."
The principal reason for this conclusion was that Brazil’s retreaded tyre industry had actually imported large quantities of otherwise-banned used tyres between 2000 and 2005 after receiving numerous court injunctions that allowed them to do so.
When the restrictions were established in 2000, Brazil imported 1.4 million used tyres a year. By 2005, the figure had grown to nearly 10.5 million, more than 8 million of which were sourced in the EU itself. Meanwhile, the EU’s exports of retreaded tyres - once over 2 million per year - had ground to a halt.
The result of the court injunctions, the panel argued, was that "used tyres of foreign origin from which retreaded tyres are made are in fact allowed to enter Brazil, with at best the same adverse impact or, at worse, a more negative impact on the objective Brazil asserts than the importation of retreaded tyres themselves would have, directly defeating the objective of the import ban itself."
In addition to undermining the health and environmental objectives Brazil claimed to pursue, the panel noted that, as a result of the court injunctions, domestic retreaders had been "able to continue to benefit from the importation of used tyres as material for their own activity in significant amounts," while their competitors from non-Mercosur countries were kept out of the Brazilian market.
"The restriction on international trade inherent in the banning of imports of retreaded tyres has thus operated to the benefit of domestic retreaders, while the fulfilment of the purpose for which it has been justified is being significantly undermined," the panel concluded.
The Brazilian government has opposed - sometimes with success - court injunctions allowing used tyre imports. The panel recognised that there were "practical difficulties that may be associated with the prevention of such imports within Brazil’s domestic legal system." Nevertheless, it noted that "the fact that the imports arise from court rulings does not exonerate Brazil from its obligation to comply with the requirements of Article XX. Rather, […] a Member of the WTO bears responsibility for acts of all its department of government, including its judiciary."
Another point of contention in the case was Brazil’s exclusion from the import ban of far smaller numbers of retreaded tyres from Mercosur partner countries Argentina, Paraguay, Uruguay, and Venezuela, on the basis of a binding regional arbitration decision. In its ruling against Brazil’s overall policy, the panel refrained from addressing the issue beyond noting that the number of tyres was currently not significant, choosing instead to exercise "judicial economy."
Throughout the case, Brazil-based manufacturers of new tyres strongly supported the government’s restrictions, which have shielded them from competition from imported retreads. In fact, the EU submitted evidence claiming that at least one company had even lobbied for the introduction of the import ban.
In a 12 June press statement, Brasilia declared that it would not appeal the panel’s decision. The Brazilian government had already filed a case with the country’s Supreme Court in an attempt to stop the lower court injunctions allowing the tyre imports to which the WTO panel objected. Sources say that it has submitted the WTO panel’s ruling to the top court in support of its case.
Brussels, for its part, said that the decision confirmed its view that the import ban was "protectionist and discriminatory." "The EU is strongly in favour of environmental and public health protection," it said, "but Brazil’s measures do not serve those objectives." Although sources suggest that some within the European Commission have misgivings about aspects of the ruling, it may not appeal either.
Past WTO rulings have found several trade restrictions to be justifiable under the health, environment, and other goals set out in the Article XX exemptions, but relatively few have met the test of non-discriminatory application.
Brazil and the EU will have 60 days to appeal before Members adopt the panel’s report.
The 245-page WTO report (WT/DS332/R) is available on http://docsonline.wto.org/
ICTSD reporting; "Panel Faults Brazil in Tyres Dispute," BRIDGES Monthly Review 11(4), June 2007 (forthcoming).