WORLD TRADE
ORGANIZATIONWT/DS246/R
1 December 2003
(03-6284)
Original:  English
EUROPEAN COMMUNITIES – CONDITIONS FOR
THE GRANTING OF TARIFF PREFERENCES
TO DEVELOPING COUNTRIES
Report of the PanelWT/DS246/R
Page i
TABLE OF CONTENTS
Page
I. INTRODUCTION ................................................................................................................. ......................1
II. FACTUAL ASPECTS ............................................................................................................. ....................3
A. THE SCHEME OF GENERALIZED TARIFF PREFERENCES ADOPTED BY THE EUROPEAN
COMMUNITIES ............................................................................................................................... .........3
B. THE GENERAL ARRANGEMENTS ..............................................................................................................3
C. THE DRUG ARRANGEMENTS ....................................................................................................................4
III. PARTIES' REQUESTS FOR FI NDINGS AND RECO MMENDATIO NS............................................4
IV. ARGUMENTS OF THE PARTIES .................................................................................................... .......6
A. FIRST WRITTEN SUBMISSION OF INDIA ....................................................................................................6
1. Factual background ........................................................................................................... .........6
2. Legal arguments.............................................................................................................. ............7
(a) The Drug Arrangements are inconsistent with Article I:1 of GATT 1994 ..........................................7
(b) The European Communities requested a waiver and implemented the Drug Arrangements
without obtaini ng a waiver ..................................................................................................... .............9
(c) The European Communities bears the burden of justifying its Drug Arrangements under the
Enabling Clause................................................................................................................ .................10
(d) The Drug Arrangements cannot be ju stified under the Enabling Clause ...........................................11
B. FIRST WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES ............................................................14
1. The Enabling Clause .......................................................................................................... .......14
(a) The Enabling Clause excludes the application of Article I:1 of the GATT .......................................14
(b) The Enabling Clause does not impose an obligation to accord unconditional MFN treatment
to the developing countries.................................................................................................... ............14
(i) The Enabling Clause does not impose an obliation to grant "differential and more
favourable treatment" to all developing countries on an MFN basis......................................14
(ii) The Enabling Clause does not impose an obligation to grant differential and more
favourable treatment  "unconditi onally"..................................................................................15
(iii) In any event, the Drug Arrangements are "unconditional".....................................................15
The case law on the interpretation of the term "unconditionally" ..........................................15The ordinary meaning of  "uncondition ally"...........................................................................16
The meaning of "unconditionally" in the context of MFN clauses.........................................16
(c) The Drug Arrangements are consistent with the Enabling Clause.....................................................17
(i) The Drug Arrangements are "non-discriminatory".................................................................17
The interpretation of the term "non-discriminatory" in paragraph 2(a)..................................17
Treating differently the developing countries that are particularly affected by the drug
problem is not "discriminatory" .............................................................................................18The application of the Drug Arrangements is "non-discriminatory"......................................19
(ii) The Drug Arrangements are "beneficial to the developing countries" ...................................21
(iii) The Drug Arrangements respond positively to the needs of developing countries.................22
2. Article XX(b) of GATT 1994................................................................................................... ...23
(a) Introduction ................................................................................................................ .......................23
(b) The Drug Arrangements are necessary for the protection of human life or health ............................23
(i) Drugs pose a risk to human life or health...............................................................................23(ii) The Drug Arrangements are "necessary" to  fight drug production and trafficking ................23
The "values" pursued by the Drug Arrangements ..................................................................23
Contribution of the Drug Arrangements to the protection of human life and health..............24Trade impact of the Drug Arrangements................................................................................24
(c) The Drug Arrangements are applied consistently with the chapeau ..................................................24
(i) Arbitrary or unjustifiable discrimination................................................................................25
(ii) Disguised restriction...................................................................................................... .........25
C. ORAL STATEMENT OF INDIA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL ................................25
1. Procedural  arguments......................................................................................................... ......25
(a) Joint representation of India and Paraguay by the same staff of the Advisory Centre on WTO
Law............................................................................................................................ ........................25
2. Substantive arguments........................................................................................................ .......26
D. ORAL STATEMENT OF THE EUROPEAN COMMUNITIES AT THE FIRST SUBSTANTIVE MEETING OF
THE PANEL ............................................................................................................................... ............31
1. Procedural  arguments......................................................................................................... ......31
(a) Joint representation of India and Paraguay by the same staff of the Advisory Centre on WTO
Law............................................................................................................................ ........................31WT/DS246/R
Page ii
2. Substantive arguments........................................................................................................ .......32
(a) The implications of this dispute............................................................................................ .............32
(b) The Enabling Clause ......................................................................................................... ................33
(c) Article XX of GATT 1994 ..................................................................................................... ...........34
E. SECOND WRITTEN SUBMISSION OF INDIA ..............................................................................................34
1. The Drug Arrangements are inconsistent with Article I:1 and the European
Communities bears the burden of pr oof under the Enabling Clause ........................................34
2. The Enabling Clause does not exclude the application of Article I:1 but authorizes
limited derogation ............................................................................................................. ........37
3. "non-discriminatory"......................................................................................................... ........39
(a) Introduction ................................................................................................................ .......................39
(b) GATT 1994 as  context ........................................................................................................ ..............39
(c) Paragraph 2(d) and 2(b) as context.......................................................................................... ..........39
(d) "the developing countries" in paragraph 2(a) as context....................................................................4 0
(e) UNCTAD instruments as context and drafting history......................................................................40(f) Paragraph 3(c) as context ................................................................................................... ...............41
(g) "Generalized" as context .................................................................................................... ...............42
(h) Implications for the WTO multilateral system................................................................................ ...42
4. The application of the Drug Arrangeme nts is not "non-d iscriminatory" ..................................43
5. The Drug Arrangements are not justified under Article XX......................................................44
(a) The Drug  Arrangements do not constitute a measure under Article XX(b)......................................44
(b) Drug Arrangements are not "necessary" within the meaning of Article XX(b).................................44
(c) Drug Arrangements do not meet the requirements of the chapeau of Article XX .............................45
F. SECOND WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES ........................................................46
1. Relationship between GATT Article I:1 and the Enabling Clause ............................................46
(a) Special and differential treatment.......................................................................................... ............46
(b) Drafting history of the 1971 Decision ....................................................................................... ........46
(c) "Positive rights"/"exceptions".............................................................................................. ..............46
(d) "Autonomous right"/"affirmative defence".................................................................................... ....47
2. The Enabling Clause .......................................................................................................... .......47
(a) Paragraph 1................................................................................................................. .......................47
(i) "Other Members" ............................................................................................................. ......47
(ii) "Unconditionally".......................................................................................................... .........48
(b) "Non-discriminatory" in paragraph 2(a) ...................................................................................... ......48
(i) The ordinary meaning ........................................................................................................ ....48
(ii) The context................................................................................................................ .............48
(iii) The object and purpose.................................................................................................... .......49
(iv) Drafting history ........................................................................................................... ...........49
(v) The Appellate Body report in EC – Bananas III.....................................................................50
(c) "Non-reciprocal" in paragraph 2(a) .......................................................................................... .........51
(d) "Beneficial" in paragraph 2(a).............................................................................................. .............51
(e) Paragraph 3(c) .............................................................................................................. .....................51
3. Article XX of GATT 1994 ...................................................................................................... ....52
(a) Drugs pose a risk to human life or health ................................................................................... .......52
(b) The Drug Arrangements are necessary to  fight drug productio n and trafficking...............................52
(i) The values pursued by the Drug Arrangements......................................................................52
(ii) Contribution of the Drug Arrangements to the protection of human life and health ..............52
Tariff preferences are an appropriate response to the drug problem ......................................52
The Drug Arrangements apply to all developing countries affected by the drug
problem which do not benefit from more favourable tariff treatment under otherarrangements................................................................................................................... .......52
The inclusion of developed countries in the Drug Arrangements would beunnecessary.................................................................................................................... ........53
The countries not included in the Drug Arrangements do not pose a threat to the
sanitary situation within the European Communities.............................................................53It is unnecessary to require that the beneficiaries implement certain anti-drug policies ........53
(iii) There are no less restrictive alternatives................................................................................ .54
(c) The Drug Arrangements are applied consistently with the chapeau ..................................................54
G. ORAL STATEMENT OF INDIA AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL ............................54
1. Introduc tion................................................................................................................. ..............54
2. The allocation of the burden of proof........................................................................................ 55
3. The relationship between the Enabling Clause and Article  I:1  of GATT 1994........................56WT/DS246/R
Page iii
4. The legal interpretation of the term "non-discriminatory" and the UNCTAD
arrangeme nts................................................................................................................... ..........56
5. Paragraph 3(c) of th e Enabling Clause ....................................................................................57
6. Alternative arguments on non-discrimination...........................................................................59
H. ORAL STATEMENT OF THE EUROPEAN COMMUNITIES AT THE SECOND SUBSTANTIVE MEETING OF
THE PANEL ............................................................................................................................... ............60
1. Relationship between Article I:1 of  the GATT and the Enabling Clause ..................................60
(a) The Enabling Clause is not an "affirmative defence" ........................................................................6 0
(i) The Enabling Clause recognizes an "autonomous right"........................................................60
(ii) The Enabling Clause imposes "positive obligations" .............................................................60
(iii) Previous panels have not treated the Enabling Clause as an affirmative defence...................60(iv) The report of the Appellate Body in Brazil – Aircraft supports the European
Communities position ........................................................................................................... .61
(b) India has the burden to prove that Article I:1 of the GATT applies to the Drug Arrangements ........61
(c) The Enabling Clause excludes the application of Article I:1 of the GATT .......................................61(d) The meaning of "unconditionally" in Article I:1 of the GATT..........................................................62
2. The Enabling Clause .......................................................................................................... .......62
(a) The meaning of "non-discrimi natory" in para graph 2(a)...................................................................62
(i) The GATT context ............................................................................................................ .....62
(ii) Paragraph 2(d)............................................................................................................. ...........62
(iii) The use of "the" before  "developing countries"......................................................................63
(iv) The UNCTAD Arrangements.................................................................................................63(v) Paragraph 3(c) and policy arguments .....................................................................................63
(b) The Drug Arrangements are "non-discriminatory"............................................................................63
3. Article XX of GATT 1994 ...................................................................................................... ....64
(a) The Drug Arrangements are "necessary" for the protection of human life and health.......................64
(b) The Drug Arrangements are applie d consistently with the chapeau ..................................................64
V. ARGUMENTS OF THE THIRD PARTIES ...........................................................................................65
A. THE ANDEAN COMMUNITY ...................................................................................................................65
1. Introduc tion................................................................................................................. ..............65
2. The important implications of this  dispute for the Andean Community ....................................65
3. The pivotal role of the Enabling Clause as part of the GATT/WTO regime for
developing countries and as a self-standing regime .................................................................68
4. "Other contracting par ties" in par agraph 1..............................................................................70
5. Paragraph 3(c) of th e Enabling Clause ....................................................................................70
6. The interpretation of the term "non-discriminatory" in footnote 3 of the Enabling
Clause......................................................................................................................... ...............71
B. COSTA RICA ............................................................................................................................... ...........72
1. Introduc tion................................................................................................................. ..............72
2. The important implications of this dispute for Costa Rica........................................................73
3. The Enabling Clause does not prohibit the granting of preferential tariff treatment to
some developing countries ...................................................................................................... ..73
4. The Enabling Clause requires donor countri es to differentiate  between developing
countries...................................................................................................................... ..............74
5. The Drug Arrangements provided by the European Communities are non-
discriminatory ................................................................................................................. ..........75
6. Paragraph 3(b) of the Enabling Clause precludes preferential treatment from
constituting an impediment to the reducti on or elimination of tariffs and other
restrictions to trade on an MFN basis.......................................................................................76
C. THE CENTRAL AMERICAN COUNTRIES OF EL SALVADOR , GUATEMALA , HONDURAS AND
NICARAGUA ............................................................................................................................... ..........76
1. Introduc tion................................................................................................................. ..............76
2. The designation of the beneficiaries of the Drug Arrangements and the assessment of
the gravity of the drug problem in Central America .................................................................77
3. The Enabling Clause is applicabl e to the Drug Arrangements.................................................77
4. The Drug Arrangements are a positive response to the needs of developing countries............78
D. MAURITIUS ............................................................................................................................... ............78
1. Introduc tion................................................................................................................. ..............78
2. India bears the burden of proof.............................................................................................. ...79
3. The Drug Arrangements ar e non-discrim inator y......................................................................79WT/DS246/R
Page iv
4. The Drug Arrangements  are justified through recourse to Article XX(b) of GATT 1994 ........80
E. PAKISTAN ............................................................................................................................... ..............80
1. Introduc tion................................................................................................................. ..............80
2. Article I:1 of the GATT 1994 does not apply to the Enabling Clause.......................................80
3. The Drug Arrangements do not require a waiver .....................................................................80
4. The inclusion of Pakistan in the Drug Arrangements is not to further the policy
objectives of the Eu ropean Communities ..................................................................................80
F. PANAMA ............................................................................................................................... ................81
1. Introduc tion................................................................................................................. ..............81
2. The important implications of  this dispute for Panama ............................................................81
3. The Enabling Clause is drafted as a statute separate and distinct from the provisions of
Article I:1 of GATT 1994 ....................................................................................................... ...82
4. The Drug Arrangements are not in contravention of Article I:1 of GATT 1994, and
paragraph 2(a) of th e Enabling Clause.....................................................................................82
5. The Enabling Clause authorizes differe ntiation between beneficiaries without
establishing discrimination .................................................................................................... ...83
6. The Drug Arrangements are a positive res ponse to the development needs of Panama
and are supported by paragraph 3( c) of the Enab ling Clause..................................................83
G. PARAGUAY ............................................................................................................................... ............84
1. Introduc tion................................................................................................................. ..............84
2. Preliminary issue of joint representation..................................................................................84
3. Systemic concerns ............................................................................................................ .........85
(a) The elimination of discrimination is a primary objective of the multilateral trading system.............85
(b) The issue of discrimination on the basis of "objective criteria" is not a matter before the
Panel.......................................................................................................................... ........................86
(c) The Enabling Clause in any case does not permit differentiation in treatment between
developing countries in the context of GSP schemes ........................................................................86
(d) The waiver mechanism provides the required flexibility...................................................................89
4. Concerns specific to the situation of Paraguay.........................................................................89
5. Conclusion................................................................................................................... ..............90
H. UNITED STATES ............................................................................................................................... .....91
1. Introduc tion................................................................................................................. ..............91
2. The preliminary issue of legal representation...........................................................................913. The Enabling Clause excludes the application of Article I:1 of GATT 1994 ............................91
4. "All" developing countries ................................................................................................... .....93
5. The Enabling Clause reference to "non-discriminatory" ..........................................................936. Article XX of GATT 1994 ...................................................................................................... ....95
VI. INTERIM REVIEW.............................................................................................................. ....................95
A.
INTRODUCTION ............................................................................................................................... .....95
B. C OMMENTS BY THE EUROPEAN COMMUNITIES ....................................................................................96
1. Joint Representation of  India and Paraguay .............................................................................96
2. Paragr aph 3(c)............................................................................................................... ...........97
3. "Non-discriminatory" in footnote 3........................................................................................... 99
4. Paragr aph 2( a)............................................................................................................... .........100
5. Dissenting Opinion........................................................................................................... .......101
VII. FINDINGS................................................................................................................... .............................103
A. PROCEDURAL ISSUES ..........................................................................................................................103
1. Joint representation of  India and Pa raguay ...........................................................................103
(a) Introduction ................................................................................................................ .....................103
(b) Conflict of interest........................................................................................................ ...................104
(c) Confidentiality............................................................................................................. ....................105
(d) Blurring the distinction between  parties and third parties................................................................10 6
B. CLAIMS OF THE PARTIES .....................................................................................................................106
C. THE NATURE OF THE ENABLING CLAUSE AND ITS RELATIONSHIP TO ARTICLE  I:1 OF GATT 1994 ........107
1. Introduc tion................................................................................................................. ............107
2. Arguments of the parties ..................................................................................................... ....107
3. Panel's analysis............................................................................................................. ..........109
(a) Nature of the Enabling Clause............................................................................................... ..........109
(b) Burden of proof unde r the Enabling Clause ................................................................................... .111WT/DS246/R
Page v
(c) Applicability of Article I:1 ................................................................................................ ..............111
(d) Relevant jurisprudence ...................................................................................................... ..............113
(e) Relevance of the importance of the policy objective pursued .........................................................114
4. Summary of findings on the nature of the Enabling Clause and its relationship to
Article I:1 .................................................................................................................... ............114
D. WHETHER THE DRUG ARRANGEMENTS ARE INCONSISTENT WITH ARTICLE  I:1 ....................................115
E. WHETHER THE DRUG ARRANGEMENTS ARE JUSTIFIED UNDER THE ENABLING CLAUSE .......................116
1. Introduc tion................................................................................................................. ............116
2. Paragr aph 3(c)............................................................................................................... .........118
(a) Arguments of the parties .................................................................................................... .............118
(b) Panel's analysis............................................................................................................ ....................120
(i) Introduction................................................................................................................ ..........120
(ii) Status of the Agreed Conclusions for the interpretation of the Enabling Clause..................121
(iii) Product coverage and depth of tariff cuts as part of the Agreed Conclusions ......................122(iv) Responding positively to developmen t needs of developi ng countries ................................124
(v) Whether a GSP scheme can be accorded to  less than all devel oping countries....................124
(vi) Safeguard mechanisms....................................................................................................... ..125
(vii) Paragraph 2(d)............................................................................................................ ..........126
(c) Summary of findings on the interpretation of paragraph 3(c)..........................................................127
3. "Non-discriminatory" in footnote 3.........................................................................................12 7
(a) Arguments of the parties .................................................................................................... .............127
(b) Panel's analysis............................................................................................................ ....................129
(i) Introduction................................................................................................................ ..........129
(ii) Resolution 21(II) .......................................................................................................... ........130
(iii) Agreed Conclusions ........................................................................................................ .....131
(iv) Recommendation A.II.1 of the First Session of UNCTAD ..................................................132
(v) Paragraph 2(d).............................................................................................................. ........133
(vi) Paragraph 3(c) ............................................................................................................. .........134
(vii) Relevance of Article I:1 of GATT 1994...............................................................................134(viii) Relevance of other GATT provisions...................................................................................134
(ix) Object and pur pose......................................................................................................... ......135
(x) Practice of preference-giving countries................................................................................135
(c) Summary of findings as to the meaning of "non-discriminatory"....................................................136
4. Paragr aph 2( a)............................................................................................................... .........136
(a) Arguments of the parties .................................................................................................... .............136
(b) Panel's analysis............................................................................................................ ....................137
5. Conclusion on the Enabling Clause ........................................................................................138
F. ARTICLE  XX( B) OF GATT 1994 AS A JUSTIFICATION FOR THE DRUG ARRANGEMENTS ........................138
1. Introduc tion................................................................................................................. ............138
2. Arguments of the parties ..................................................................................................... ....139
3. Panel's analysis............................................................................................................. ..........142
(a) Whether the Drug Arrangements co nstitute a measure under Article XX(b) ..................................142
(b) Necessity of the measure .................................................................................................... .............145
(c) "Chapeau"................................................................................................................... .....................147
4. Summary of findings on Article XX .........................................................................................149
VIII.CONCLUSIONS A ND RECOMMENDAT IONS .................................................................................150
IX. DISSENTING OPINION BY ONE MEMBER OF THE PANEL.......................................................151WT/DS246/R
Page vi
TABLE OF CASES CITED IN THIS REPORT
Short Title Full Case Title and Citation
Argentina – Textiles and
ApparelAppellate Body Report, Argentina – Measures Affecting Imports of
Footwear, Textiles, Apparel and Other Items , WT/DS56/AB/R and Corr.1
adopted 22 April 1998, DSR 1998:III, 1003
Belgium – Family Allowances Panel Report, Belgian Family Allowances (allocations familiales) , adopted
7 November 1952, BIDS 1S/59
Brazil – Aircraft Appellate Body Report, Brazil – Export Financing Programme for Aircraft ,
WT/DS46/AB/R, adopted 20 Au gust 1999, DSR 1999:III, 1161
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of
Civilian Aircraft , WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III,
1377
Canada – Autos Panel Report, Canada – Certain Measures Affecting the Automotive
Industry , WT/DS139/R, WT/DS142/R, a dopted 19 June 2000, as modified
by the Appellate Body Report,  WT/DS139/AB/R, WT/DS142/AB/R,
DSR 2000:VII, 3043
Canada – Autos Appellate Body Report, Canada – Certain Measur es Affecting the
Automotive Industry , WT/DS139/AB/R, WT /DS142/AB/R, adopted
19 June 2000, DSR 2000:VI, 2995
Canada – PharmaceuticalPatents
 Panel Report, Canada – Patent Protection of Pharmaceutical Products ,
WT/DS114/R, adopted 7 April 2000, DSR 2000:V, 2295
EC – Asbestos Appellate Body Report, European Communities – Measures Affecting
Asbestos and Asbest os-Containing Products , WT/DS135/AB/R, adopted
5 April 2001
EC – Bananas III Appellate Body Report, European Communities – Regime for the
Importation, Sale and Di stribution of Bananas , WT/DS27/AB/R, adopted
25 September 1997, DSR 1997:II, 591
EC – Hormones Appellate Body Report, EC Measures Concerning Meat and Meat Products
(Hormones) , WT/DS26/AB/R, WT /DS48/AB/R, adopted
13 February 1998, DSR 1998:I, 135
EC – Sardines Appellate Body Report, European Communities – Trade Description of
Sardines , WT/DS231/AB/R, adopted 23 October 2002
India – Patents (US) Appellate Body Report, India – Patent Protecti on for Pharmaceutical and
Agricultural Chemical Products , WT/DS50/AB/R, adopted
16 January 1998, DSR 1998:I, 9
Indonesia – Autos Panel Report, Indonesia – Certain Measures Affecting the Automobile
Industry , WT/DS54/R, WT/DS55/R, WT/D S59/R, WT/DS64/R and Corr.1,
2, 3, and 4, adopted 23 July 1998, DSR 1998:VI, 2201
Japan – AlcoholicBeverages IIAppellate Body Report, Japan – Taxes on Alcoholic Beverages ,
WT/DS8/AB/R, WT/DS10/AB /R, WT/DS11/ AB/R, adopted
1 November 1996, DSR 1996:I, 97
Korea – Dairy Appellate Body Report, Korea – Definitive Safeguard Measure on Imports
of Certain Dairy Products , WT/DS98/AB/R, adopted 12 January 2000,
DSR 2000:I, 3
Korea – Various Measures onBeef
 Appellate Body Report, Korea – Measures Affect ing Imports of Fresh,
Chilled and Frozen Beef , WT/DS161/AB/R, WT /DS169/AB/R, adopted
10 January 2001
Turkey – Textiles Appellate Body Report, Turkey – Restrictions on Imports of Textile and
Clothing Products , WT/DS34/AB/R, adopted 19 November 1999,
DSR 1999:VI, 2345WT/DS246/R
Page vii
Short Title Full Case Title and Citation
US – Customs User Fee Panel Report, United States – Customs User Fee , adopted
2 February 1988, BISD 35S/245
US – Gasoline Appellate Body Report, United States – Standards for Reformulated and
Conventional Gasoline , WT/DS2/AB/R, adopted 20 May 1996,
DSR 1996:I, 3
US – FSC Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations" , WT/DS108/AB/R, adopted 20 March 2000,
DSR 2000:III, 1619
US – FSC(Article 21.5 – EC)Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations" – Recourse to Arti cle 21.5 of the DSU by the European
Communities , WT/DS108/AB/RW, adopted 29 January 2002
US – Offset Act (Byrd
Amendment)Appellate Body Report, United States – Continued Dumping and Subsidy
Offset Act of 2000 , WT/SD217/AB/R, WT/D S234/AB/R, adopted
27 January 2003
US – Section 337 Panel Report, United States Section 337 of the Tariff Act of 1930 , adopted
7 November 1989, BISD 36S/345.
US – Shrimp Appellate Body Report, United States – Import Prohibition of Certain
Shrimp and Shrimp Products , WT/DS58/AB/R, adopted 6 November 1998,
DSR 1998:VII, 2755
US – Wool Shirts and Blouses Appellate Body Report, United States – Measure Affecting Imports of
Woven Wool Shirts and Blouses from India , WT/DS33/AB/R and Corr.1,
adopted 23 May 1997, DSR 1997:I, 323
US – MFN Footwear Panel Report, United States – Denial of Most-Favoured-Nation Treatment
as to Non-Rubber Footwear from Brazil , adopted 19 June 1992,
BISD 39S/128WT/DS246/R
Page viii
LIST OF ANNEXES
Page
ANNEX A
Annex A Decision of the Panel on the Request for Enhanced Third Party Rights A-2
ANNEX B
Parties
Annex B-1 Replies of India to Questions from the Panel after the First Panel
MeetingB-2
Annex B-2 Replies of the European Communities to Questions from the Panel
after the First Panel MeetingB-36
Annex B-3 Replies of the European Communities to Questions from India after the
First Panel MeetingB-68
Annex B-4 Replies of India to Questions from the Panel after the Second Panel
MeetingB-83
Annex B-5 Replies of the European Communities to Questions from the Panel
after the Second Panel MeetingB-111
Annex B-6 Comments of India to the Replies of the European Communities to
Question from the Panel after the Second Panel MeetingB-141
Annex B-7 Comments of the European Communities to the Replies of India to
Questions from the Panel after the Second Panel MeetingB-159
ANNEX C
Third Parties
Annex C-1 Replies of the Andean Community Collectively to Questions from the
Panel and from India after the First Panel MeetingC-2
Annex C-2 Replies of Members of the Andean Community Separately to
Questions from the Panel and from India after the First Panel MeetingC-9
Annex C-3 Reply of Brazil to the Question from India after the First Panel
MeetingC-14
Annex C-4 Replies of Costa Rica to Questions from the Panel and from India after
the First Panel MeetingC-15
Annex C-5 Replies of El Salvador, Guatemala, Honduras and Nicaragua to
Questions from the Panel after the First Panel MeetingC-20
Annex C-6 Replies of Panama to Questions from the Panel and from India after
the First Panel MeetingC-21
Annex C-7 Replies of Paraguay to Questions from the Panel and from India after
the First Panel MeetingC-27
Annex C-8 Replies of the United States to Questions from the Panel and from
India after the First Panel MeetingC-40
ANNEX D
Annex D-1 Differential and More Favourable Treatment, Reciprocity and Fuller
Participation of Developing Countries (the "Enabling Clause")D-2
Annex D-2 Decision on Generalized System of Preferences (the "1971 Waiver
Decision")D-4
Annex D-3 Resolution of the Second Session of UNCTAD on the Expansion and
Diversification of Exports of Manufactures and Semi-Manufactures of
developing countries ("Resolution 21 (II))D-6
Annex D-4 Agreed Conclusions of the Special Committee on Preferences
("Agreed Conclusions")D-8
ANNEX E
Annex E List of Waivers for Preferences E-IWT/DS246/R
Page 1
I. INTRODUCTION
1.1 On 5 March 2002, pursuant to Article 4 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes (hereafter the "DSU"), Article XXIII:1 of the General
Agreement on Tariffs and Trade 1994 (hereafter the "GATT 1994") and paragraph 4(b) of the
Decision on Differential and More Favourable Treatm ent, Reciprocity and Fuller Participation of the
Developing Countries1, (hereafter the "Enabling Clause"), India requested consultations with the
European Communities regarding the conditions  under which the European Communities accords
tariff preferences to developing countries under the scheme of generalized tariff preferences
formulated under Council Regulation (EC) No.. 2501/2001.  The request was circulated to Members
on 12 March 2002.2
1.2 Consultations were held on 25 March 2002, but did not lead to a mutually satisfactory
resolution of this matter.
1.3 On 6 December 2002, India requested the Dispute Settlement Body ("DSB") to establish a
panel pursuant to Articles 4.7 and 6 of the DSU and Article XXIII:2 of GATT 1994.3  On 16 January
2003, India requested the establishment of a panel for the second time.  On 27 January 2003, the DSB
established the Panel with the following terms of reference:
"To examine, in the light of the relevant provisions of the covered agreements cited
by India in document WT/DS246/4, the matter referred to the DSB by India in that
document, and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements."4
1.4 On 24 February 2003, India requested the Director-General to determine the composition of
the Panel pursuant to Article 8.7 of the DSU.
1.5 In its request for the establishment of a panel, India made claims not only with respect to the
European Communities' special arrangements to combat drug production and trafficking, but also
with respect to the European Communities' special incentive arrangements for the protection of the
environment and labour rights.  On 28 February 2003, during the meeting with the Director-General
regarding the composition of the Panel, India informed both the European Communities and theDirector-General that it had decided to limit the present complaint to the tariff preferences granted by
the European Communities under its Drug Arrangements.  India noted that no preferences had so far
been granted under the special incentive arrangements for the protection of the environment and that
only one country, Moldova, had thus far been accorded preferences under the special incentive
arrangements for the protection of labour rights.  India made it clear that it reserved its right to bring
separate new complaints on the environmental and labour arrangements if the European Communities
were to apply them in a manner detrimental to Indi a's trade interests or if the European Communities
were to renew them after the lapse of its current General System of Preferences scheme on 31
December 2004.  India confirmed the above in writing in a communication to the European
Communities, dated 3 March 2003.
                                                     
1 GATT Document, L/4903, BISD 26S/203.
2 Request for Consultations by India,  European Communities – Conditions  for the Granting of Tariff
Preferences to Developing Countries,  12 December 2002 (WT/DS246/1).
3 Request for the Establishment of a Panel by India, European Communities – Conditions for the
Granting of Tariff Preferen ces to Developing Countries , 9 December 2002 (WT/DS246/4).
4 WT/DS246/5, 6 March 2003, para. 2.WT/DS246/R
Page 2
1.6 On 6 March 2003, the Director-General determined the composition of the Panel as follows:
Chairman: Mr Julio Lacarte-Muró
Members: Professor Marsha A. Echols
Professor Akio Shimizu5
1.7 Bolivia, Brazil, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras,
Mauritius, Nicaragua, Pakistan, Panama, Paraguay, Peru, Sri Lanka, the United States and Venezuela
reserved their respective right to participate in the panel proceedings as third parties.6
1.8 On 31 March 2003, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala,
Honduras, Nicaragua, Panama, Peru and Venezuela requested the Panel's permission to attend all the
Panel meetings, to present arguments at such meetings, to receive copies of all submissions to the
Panel, to make submissions to the Panel at its second meeting and to review the draft summary of
arguments in the descriptive part of the Panel Report.
1.9 On 8 April 2003, the Panel asked for comments from the parties and third parties regarding
the above request.  On 17 April 2003, Pakistan also joined in the request for additional third-party
rights.  Brazil, Cuba, Mauritius, Paraguay and the United States stated that all third parties should be
given the same treatment in the event that the Pane l decides to grant such additional rights to third
parties.
1.10 On 7 May 2003, the Panel decided to provide the following additional rights to all third
parties:
• observe the first substantive meeting with the parties;
• receive the second submissions of the parties;
• observe the second substantive meetings with the parties;
• make a brief oral statement during the second substantive meetings with the parties;
• review the summary of their respective arguments in the draft descriptive part of the
Panel Report.7
1.11 The Panel met with the parties on 14 and 16 May 2003 as well as on 8 and 9 July 2003.  The
Panel met with the third parties on 15 May 2003.  Further to the decision of 7 May 2003, third partieswere given the opportunity to observe the meeting of the Panel with the parties on 14 and
16 May 2003 and on 8 and 9 July 2003 as well as make brief statements on 9 July 2003.
1.12 The Andean Community consisting of Bolivia, Colombia, Ecuador, Peru and Venezuela, the
Central America countries of El Salvador, Guatemala, Honduras and Nicaragua, forming respective
groups for the purposes of this dispute, as well as Costa Rica, Mauritius, Panama, Paraguay and theUnited States presented third-party submissions at the first substantive meeting of the Panel.  These
countries/groups, as well as Bolivia, Colombia, Ecuador, Peru and Venezuela individually, and
Pakistan, made oral statements during the first su bstantive meeting of the Panel.  Only the Andean
Community, Colombia, Panama, Paraguay and the United States made oral statements during the
second substantive meeting of the Panel.
1.13 The Panel issued its interim report to the parties on 5 September 2003.  The Panel issued its
final report to the parties on 28 October 2003.
                                                     
5 Ibid.
6 Ibid.
7 See Annex 1 to this Report.WT/DS246/R
Page 3
II. FACTUAL ASPECTS
2.1 This dispute concerns the special arrangements to combat drug production and trafficking (the
Drug Arrangements) as provided in Council Regulation (EC) No. 2501/2001 of 10 December 2001,
applying a scheme of generalized tariff preferences for the period from 1 January 2002 to
31 December 2004, as well as the implementation of the Drug Arrangements.
A. THE SCHEME OF GENERALIZED TARIFF PR EFERENCES ADOPTED BY THE EUROPEAN
COMMUNITIES
2.2 The European Communities applies a scheme of tariff preferences for certain goods from
developing countries and economies in transition under Council Regulation (EC) No. 2501/20018
("the Regulation").  The Regulation provides for five different tariff preference arrangements:
(i) the General Arrangements;
(ii) the Special Incentive Arrangements for the protection of labour rights;(iii) the Special Incentive Arrangements for the protection of the environment;
(iv) the Special Arrangements for least-developed countries;  and
(v) the Special Arrangements to combat drug production and trafficking (the "Drug
Arrangements").
2.3 Tariff preferences under the General Arrangements are accorded to the countries listed in
Annex I to the Regulation.  The additional preferences under the Special Incentive Arrangements for
the protection of labour rights and the protection of the environment are accorded exclusively to
countries which are determined by the European  Communities to comply with certain labour and
environmental policy standards.  The additional preferences under the Special Arrangements forleast-developed countries are limited to the least-developed countries listed in Annex I to the
Regulation.  The Drug Arrangements currently apply to 12 countries.  These various arrangements
differ in the depth of the tariff cuts provided, the products covered and the requirements that must be
met by eligible countries.
B. 
THE GENERAL ARRANGEMENTS
2.4 Under the General Arrangements, all the countries and territories listed in Annex I to the
Regulation are eligible to receive tariff preferences.  The products covered are listed in Annex IV tothe Regulation.  These products are divided into two categories: non-sensitive and sensitive.
2.5 Article 7 of the Regulation specifies that non-sensitive products will enjoy duty-free access
while sensitive products are subject to reduced tariffs.  For sensitive products, the tariff duty reduction
is calculated by applying:  (i) a flat rate reduction of 3.5 percentage points to the Common Customs
Tariff duties in the case of ad valorem duties (except for products of Chapters 50 to 63 where the
ad valorem duty is reduced by 20 per cent);  or (ii) a 30 per cent reduction to the Common Customs
Tariff duties in the case of specific duties (except for products of CN code 2207 where the specific
duty is reduced by 15 per cent).  Wherever the Common Customs Tariff duty is expressed as a
combination of an ad valorem duty and a specific duty, the preferential reduction is limited to the
ad valorem duty.
                                                     
8 [2001] OJ L346/1 (Exhibit India-6).WT/DS246/R
Page 4
C. THE DRUG ARRANGEMENTS
2.6 Article 10 of the Regulation states:
"1. Common Customs Tariff ad valorem duties on products, which according to
Annex IV, are included in the special arrangements to combat drug production and
trafficking referred to in Title IV and wh ich originate in a country that according to
Column I of Annex I benefits from those arrangements, shall be entirely suspended.
For products of CN code 0306 13, the duty shall be reduced to a rate of 3.6 per cent.
2. Common Customs Tariff specific duties on products referred to in paragraph
1 shall be entirely suspended, except for products for which Common Customs Tariff
duties also include ad valorem duties.  For products of CN codes 1704 10 91 and
1704 10 99 the specific duty shall be limited to 16 per cent of the customs value."
2.7 The benefits under the Drug Arrangements currently apply to 12 named countries: Bolivia,
Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Pakistan, Panama,
Peru and Venezuela.  The products included under the Drug Arrangements are listed in column D of
Annex IV to the Regulation (the "covered products").  This list comprises products that are included
in the General Arrangements as well as several products which are not included under the General
Arrangements.  The covered products enjoy duty-free access to the European Communities' market,except for products of CN codes 0306 13, 1704 10 91 and 1704 10 99, for which Article 10 of the
Regulation prescribes different tariff cuts.
9
2.8 The result of the Regulation is that the tariff reductions accorded under the Drug
Arrangements to the 12 beneficiary countries are greater than the tariff reductions granted under the
General Arrangements to other developing countries.  In respect of products that are included in theDrug Arrangements but not in the General Arrangements, the 12 beneficiary countries are granted
duty free  access to the European Communities' market, while all other developing countries must pay
the full duties applicable under the Common Customs Tariff .  In respect of products that are included
in both the Drug Arrangements and the General Arrangements and that are deemed "sensitive" under
column G of Annex IV to the Regulation with the exception for products of CN codes 0306 13, 170410 91 and 1704 10 99, the 12 beneficiary countries are granted duty-free  access to the European
Communities' market, while all other developing countries are entitled only to reductions  in the duties
applicable under the Common Customs Tariff .
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
3.1 India requests the Panel to find that the Drug Arrangements set out in Article 10 of Council
Regulation No 2501/2001 are inconsistent with Article I:1 of GATT 1994 and are not justified by the
Enabling Clause.
10
3.2 India requests the Panel to find that the Drug Arrangements have nullified or impaired
benefits accruing to India under the GATT 1994.  India argues that under Article 3.8 of the DSU, in
cases where there is an infringement of the obligations assumed under a covered agreement, the action
is considered to constitute a prima facie case of nullification or impairment of benefits under that
agreement.11
                                                     
9 Additionally, covered products do not enjoy duty-free access where they are subject to exceptions
external to the Drug Arrangements, e.g., sector graduation under Article 12 of the Regulation and temporary
withdrawal under Article 26 of the Regulation.
10 First written submission of India, para. 67.
11 First written submission of India, para. 68.WT/DS246/R
Page 5
3.3 India states that according to Article 19.1 of th e DSU, where a panel concludes that a measure
is inconsistent with a covered agreement, it sh all recommend that the Member concerned bring the
measure into conformity with that agreement.  Accordingly, India requests the Panel to recommend
that the DSB request the European Communities to bring the measure at issue into conformity with
the GATT 1994.
3.4 India also indicates that according to the second sentence of Article 19.1 of the DSU, the
Panel may suggest ways in which the European Communities could implement the Panel's
recommendation.  For the reasons set out in the introduction in its first submission, India requests the
Panel to suggest that the European Communities brings its measure into conformity with its
obligations under the WTO Agreement by:
(a) extending the tariff preferences granted under the Drug Arrangements to all other
developing country Members consistently with the Enabling Clause;  or
(b) obtaining a waiver from its obligations under Article I:1 of GATT 1994 on terms and
conditions satisfactory to Members.12
3.5 The European Communities maintains that the Enabling Clause is an autonomous right not an
affirmative defence and it excludes the application of Article I.  Consequently, in order to establish a
violation of Article I:1 of GATT 19 94 or a violation of the Enabling Clause,  India bears the burden to
establish the following:
(a) the Drug Arrangements are not covered by paragraph 2(a) of the Enabling Clause but
covered by Article I:1 of GATT 1994;  or that,
(b) the Drug Arrangements are covered by paragraph 2(a) of the Enabling Clause but are
inconsistent with paragraph 3(c).13
3.6 In light of its position on the issue of allocation of burden of proof in this dispute, the
European Communities requests the Panel to find:
(a) that the Drug Arrangements fall within the scope of paragraph 2(a) of the Enabling
Clause, not within that of Article I:1, and therefore dismiss India's claim under that
provision;14
(b) that since India asserts that it is not making any claim under the Enabling Clause, the
Panel should refrain from further examining whether the Drug Arrangements are
consistent with paragraph 3(c) of the Enabling Clause;15  and,
(c) that all the claims brought by India in this disputes should be dismissed based on
reasons given  by the European Communities in the proceedings.16
3.7 If the Panel were to find that the Drug Arrangements fall within Article I:1of GATT 1994,
and that they are prima facie  inconsistent with that provision, the European Communities requests the
                                                     
12 First written submission of India, para. 70.
13 First written submission of the European Communities, para.19.
14 First written submission of the European Communities, para.20 and 217;  second oral statement of
the European Communities, para.81.
15 Second oral statement of the European Communities, para.25.
16 First written submission of the European Communities, para. 217.WT/DS246/R
Page 6
Panel to find that they are justified under Article XX(b) of GATT 1994 and therefore dismiss all the
claims brought by India in this disputes.17
IV. ARGUMENTS OF THE PARTIES
A. FIRST WRITTEN SUBMISSION OF INDIA
1. Factual background
4.1 The European Communities applies a scheme of tariff preferences for certain goods from
developing countries and economies in transition under Council Regulation (EC) No. 2501/2001 of
10 December 2001 applying a scheme of generalized tariff preferences for the period from 1 January
2002 to 31 December 2004.18  The Regulation provides for five different tariff preference
arrangements:
(a) the General Arrangements;
(b) the Special Incentive Arrangements for the protection of labour rights;
(c) the Special Incentive Arrangements for the protection of the environment;(d) the Special Arrangements for least-developed countries;  and(e) the Special Arrangements to combat drug production and trafficking (the "Drug
Arrangements").
4.2 Tariff preferences under the General Arrangements are accorded to the countries listed in
Annex I to the Regulation.  The additional preferences under the Special Incentive Arrangements for
the protection of the labour rights and the protection of the environment are accorded exclusively to
countries that are determined by the European Communities to comply with certain labour and
environmental policy standards.  The additional preferences under the Special Arrangements for
least-developed countries are limited to the least-developed countries listed in Annex I to theRegulation.  The Drug Arrangements are limited to Bolivia, Colombia, Costa Rica, Ecuador, El
Salvador, Guatemala, Honduras, Nicaragua, Pakist an, Panama, Peru and Venezuela (the "preferred
Members").  These various arrangements differ in the depth of the tariff cuts provided, the products
covered, the requirements that must be met by eligible countries and the grounds on which tariff
preferences can be reduced or removed.
4.3 Under the General Arrangements, all the countries and territories listed in Annex I to the
Regulation are eligible to receive tariff preferences.  The products covered are listed in Annex IV tothe Regulation.  These products are divided into two categories: non-sensitive and sensitive.
4.4 Article 7 of the Regulation specifies that non-sensitive products will enjoy duty-free access
while sensitive products are subject to reduced tariffs.  For sensitive products, the tariff duty reduction
is calculated by applying:  (i) a flat rate reduction of 3.5 percentage points to the Common Customs
Tariff duties in the case of ad valorem duties (except for products of Chapters 50 to 63 where the
ad valorem duty is reduced by 20 per cent);  or (ii) a 30 per cent reduction to the Common Customs
Tariff duty if that tariff is expressed as a specific duty (except for products of CN code 2207 where
the specific duty is reduced by 15 per cent).  Wherever the Common Customs Tariff duty is expressed
as a combination of an ad valorem duty and a specific duty, the preferential reduction is limited to the
ad valorem duty.
                                                     
17 Second oral statement of the European Communities, para. 81.
18 [2001] OJ L346/1 (Exhibit India-6).WT/DS246/R
Page 7
4.5 Article 10 of the Regulation states:
"1. Common Customs Tariff ad valorem duties on products, which according to
Annex IV, are included in the special arrangements to combat drug production and
trafficking referred to in Title IV and wh ich originate in a country that according to
Column I of Annex I benefits from those arrangements, shall be entirely suspended.For products of CN code 0306 13, the duty shall be reduced to a rate of 3.6 per cent.
2. Common Customs Tariff specific duties on products referred to in paragraph
1 shall be entirely suspended, except for products for which Common Customs Tariff
duties also include ad valorem duties.  For products of CN codes 1704 10 91 and
1704 10 99 the specific duty shall be limited to 16 per cent of the customs value."
4.6 The benefits under the Drug Arrangements are limited to the preferred Members.  The
products included under the Drug Arrangements are listed in Column D of Annex IV to theRegulation (the "covered products").  This list comprises products that are included in the General
Arrangements as well as several products which are not included under the General Arrangements.
The covered products enjoy duty-free access to th e European Communities' market, except where
specifically provided in Article 10 of the Regulation.
4.7 It follows from the above that the tariff reductions accorded under the Drug Arrangements to
the preferred Members are greater than the tariff reductions granted under the General Arrangements.
In respect of products that are included in th e Drug Arrangements but not in the General
Arrangements, the preferred Members are granted duty-free  access to the European Communities'
market, while all other developing countries must pay the full duties applicable under the Common
Customs Tariff .  Furthermore, in respect of products that are included in both the Drug Arrangements
and the General Arrangements and that are deemed "sensitive" under Column G of Annex IV to the
Regulation, the preferred Members are granted duty-free  access to the European Communities'
market, while all other developing countries are entitled only to reductions  in the duties applicable
under the Common Customs Tariff .
2. Legal arguments
(a) The Drug Arrangements are inconsistent with Article I:1 of GATT 1994
4.8 The tariff preferences granted under the Drug Arrangements are inconsistent with Article I:1
of the GATT, which requires the European Communities to accord unconditional MFN treatment to
products originating in the territories of all Members.  The MFN principle is a fundamental norm of
the rules-based multilateral trading system of the WTO.  As pointed out by the Appellate Body, this
principle has "long been a cornerstone of the GATT and is one of the pillars of the WTO trading
system".  Embodying this principle, Article I:1 of GATT 1994 provides in relevant part:
"With respect to customs duties …, any advantage ...  granted by any [Member] to
any product originating in … any other country shall be accorded ... immediately and
unconditionally  to the like product originating in … the territories of all other
[Members] ." (emphasis added)
4.9 The MFN principle embodied in the GATT thus comprises two equally important
requirements:  first, advantages related to customs duties must be extended to all other Members and,
second, the extension must be immediate and unconditional.WT/DS246/R
Page 8
4.10 The corresponding adjective of the adverb "unconditionally" is "unconditional", which is
defined as: "Not subject to or limited by conditions; absolute, complete."19  In applying Article I:1 of
the GATT, in Canada – Autos , the Appellate Body referred to the undisputed finding of the panel that
the "term 'unconditionally' refers to advantages conditioned on the 'situation or conduct' of exporting
countries".20  The panel had found that:
"The purpose of Article I:1 is to ensure unconditional MFN treatment.  In this
context, we consider that the obligation to accord 'unconditionally' to third countries
which are WTO Members an advantage which has been granted to any country means
that the extension of that advantage may not be made subject to conditions with
respect to the situation or conduct of those countries.  This means that an advantage
granted to the product of any country must be accorded to the like product of all
WTO Members without discrimination as to origin."21  (emphasis added)
4.11 It follows from the above that a Member granti ng any advantage to any product originating in
any other country has the obligation to accord that advantage to like products of all other Members
regardless of their situation or conduct.
4.12 The tariff preferences granted to covered products originating in the preferred Members
constitute an "advantage".  Under the Drug Arrangements, the European Communities imposescustoms duties on imports of covered products originating in the preferred Members at rates lower
than those imposed on like products originating in all other Members.
22  This accords an advantage23
to covered products originating in the preferred Members.
4.13 The advantages under the Drug Arrangements are available only to the 12 preferred
Members.  The tariff preferences granted to th e covered products originating in the preferred
Members are consequently not accorded to like products originating in the territories of all other
Members.
4.14 The European Communities fails to accord the advantage of the tariff preferences to like
products originating in the territories of other Members unconditionally.  The EC Regulation
establishing the current GSP scheme does not indicate on the basis of which criteria the preferredMembers were selected.  The 1998 Regulation extending the previous GSP scheme indicates that the
Drug Arrangements were intended to benefit "countries undertaking effective programmes to combat
drug production and trafficking".
24  Whether or not the European Communities has in fact applied this
criterion uniformly to all Members is legally irrelevant because Article I:1 of GATT 1994 does not
permit the European Communities to make the extension of the advantages under the Drug
Arrangements conditional upon the situation or conduct of  the exporting countries.
                                                     
19 The New Shorter Oxford English Dictionary , 4th Edition, p. 3465.
20 Appellate Body Report, Canada – Autos , para. 76.
21 Panel Report, Canada – Autos , para. 10.23.
22 With the exception of like products from least-developed countries covered under the Special
Arrangements for least-developed countries.  Hereinafte r (as regards First written submission of India), unless
the context otherwise requires, "all other Members" excludes least-developed country Members.
23 The relevant ordinary meaning of "advantage" is "I.  superior position 1.  The position, state, or
circumstance of being ahead of another, or having the better of him or her…2.  A favouring circumstance;
something which gives one a better position" The New Shorter Oxford English Dictionary , 4th Edition, p. 31.
24 Introductory clause No. 17, Council Regulatio n (EC) No.. 2820/1998 of 21 December 1998 applying
a multiannual scheme of generalized tariff prefer ences for the period 1 July 1999 to 31 December 2001 [1998]
OJ L367/1.WT/DS246/R
Page 9
(b) The European Communities requested a waiver and implemented the Drug Arrangements
without obtaining a waiver
4.15 Under Article IX:3 of the Marrakesh Agreement Establishing the World Trade Organization,
a Member may apply for a waiver from its obligations under that Agreement or any of the multilateral
trade agreements, including the obligations under Article I:1 of GATT 1994 .
4.16 The European Communities itself acknowledges that a waiver from its obligations under
Article I:1 of GATT 1994 was required before it could apply the tariff preferences under the Drug
Arrangements.  On 24 October 2001, the European Communities submitted a request for a waiver
with the following explanation:
"The revised special arrangements to combat drug production and trafficking that
should apply from 1 January 2002 will be open to eligible products listed in Annex I
originating in Bolivia, Colombia, Cost a Rica, Ecuador, El Salvador, Guatemala,
Honduras, Nicaragua, Pakistan, Panama, Peru and Venezuela.
Because the special arrangements are only available to imports originating in those
Members, a waiver from the provisions of paragraph 1 of Article I of GATT 1994
appears necessary before they can effectively enter into force  for reasons of legal
certainty."25  (emphasis added)
4.17 The need to obtain a waiver has also been acknowledged by the preferred Members that are
member countries of the Andean Community, namely Bolivia, Colombia, Ecuador, Peru, and
Venezuela.  This acknowledgement is recorded in the Aide-Memoire  of the Joint Andean Community-
European Commission Technical Evaluation Meeti ng on the Profitable Use of the Andean GSP, as
follows:
"In this context the CAN [Andean Community] pointed out the need for the EC to
obtain a waiver in order to continue granting preferences to the drug-related regime in
the face of pressure brought to bear by countries that consider themselves affected by
that regime."26
4.18 The European Communities has thus far fa iled to obtain the required waiver.
Notwithstanding the absence of a waiver, the European Communities decided to implement the Drug
Arrangements.
4.19 As noted by the Appellate Body, "[T]he  proh ibition of discrimination in Article 1:1 also
serves as an incentive for concessions, negotiated reciprocally, to be extended to all other Members on
an MFN basis".27  Any derogation from the obligation under Article I:1 of GATT 1994 upsets the
balance of rights and obligations resulting from market access negotiations.  It is therefore essential
that any derogation from the MFN obligation is based on conditions that maintain that balance.  Byimplementing the Drug Arrangements without the benefit of a waiver, the European Communities
unilaterally upset the balance of right and obligations under the GATT 1994 and deprived all other
Members, particularly the developing countries excluded from these arrangements, of their right to
compensation for the trade diversion to which they are subjected.
                                                     
25 Request for a WTO Waiver – New EC Special Tariff Arrangements to Combat Drug Production and
Trafficking, 24 October 2001 (G/C/W/328) (Exhibit India-2[a]) as revised on 23 November 2001(G/C/W/328/Add. 1) (Exhibit India-2[b]).
26 "Aide-Memoire of the Joint Andean Community-European Commission Technical Evaluation
Meeting on the Profitable Use of the Andean GSP,21-22 November 2002"
<http://www.comunidadandina.org/ingles/common/europa_2.htm> (last accessed 6 March 2003) (ExhibitIndia-3).
27 Appellate Body Report, Canada – Autos, footnote 4, para. 84.WT/DS246/R
Page 10
(c) The European Communities bears the burden of justifying its Drug Arrangements under the
Enabling Clause
4.20 The European Communities bears the burden of  demonstrating that the Drug Arrangements
are consistent with the Enabling Clause.  The Enabling Clause allows Members to derogate from their
obligations under Article I:1 of GATT 1994.  The Enabling Clause therefore constitutes an affirmativedefence that the European Communities might invoke to justify an inconsistency with Article I:1 of
GATT 1994.  The Member invoking an affirmative defence has the burden of proving that defence.
28
Thus, should the European Communities invoke the En abling Clause as a defence, it bears the burden
of establishing that the Drug Arrangements are justified under the Enabling Clause.
4.21 For the sake of procedural efficiency, India will present its views on this issue in this first
submission.
4.22 The Enabling Clause does not absolve developed country Members from their obligation to
accord MFN treatment to products originating in developing countries.  Paragraph 1 of the Enabling
Clause allows Members, notwithstanding Article I of GATT 1994, to accord differential and more
favourable treatment to developing countries without according such treatment to other Members
under the situations enumerated in paragraph 2.  In this dispute, the relevant situation is that described
under paragraph 2(a), i.e., preferential tariff treatment accorded by developed country Members toproducts originating in developing countries in accordance with the GSP.  Paragraphs 1 and 2(a) can
be paraphrased as follows:
Notwithstanding the provisions of Article I of the GATT, developed country
Members may accord preferential tariff treatment to products originating in
developing countries in accordance with the GSP without according such treatment toother Members.
4.23 Under Article I:1 of GATT 1994, any advantage, favour, privilege or immunity granted to a
product originating in any country shall be granted immediately and unconditionally to the like
product originating in all other Members.  "Other Members" include both developed and developing
country Members.  Thus, under this rule there can be no discrimination between like products of bothdeveloped and developing countries.
4.24 The Enabling Clause allows developed country Members to accord preferential tariff
treatment to products originating in developing countries in accordance with the GSP without
according such treatment to "other Members".  The Enabling Clause distinguishes between
"developing countries" and "other Members".  The te rm "other Members" in this context thus  refers
to other developed country Members.  The phrase "notwithstanding the provisions of Article I of the
GATT" thus allows developed country Members to derogate from the obligation to grant MFNtreatment to products originating in developed countries.  However, nothing in the Enabling Clause
modifies their obligation to extend to all developing countries any advantage accorded to one of them.
4.25 This reading of paragraph 2(a) of the Enabling Clause is confirmed by the exception made in
paragraph 2(d) which permits:
"Special treatment of the least developed among the developing countries in the
context of any general or specific measures in favour of developing countries."
4.26 There would be no need to permit in paragraph 2(d) special treatment of the least-developed
countries within the category of "developing countries receiving favourable treatment" if
                                                     
28 Appellate Body Report, US – Wool Shirts and Blouses , DSR 1997:1; 323, at 337;  Appellate Body
Report, US – FSC (Article 21.5 – EC) , para. 133.WT/DS246/R
Page 11
paragraph 2(a) of the Enabling Clause permitted developed country Members to accord advantages to
a selected group of developing countries
4.27 As pointed out above, the MFN principle embodi ed in Article I:1 of GATT 1994 comprises
two equally important requirements: First, advantages related to customs duties must be extended to
all other Members and, second, the extension must be unconditional, that is independent of the
situation or conduct of the exporting country .  The only function of paragraph 2(a) of the Enabling
Clause is to provide a partial exemption from the first of these two requirements.  There is nothing in
the Enabling Clause that addresses the second requirement.  There is consequently nothing in the
terms of the Enabling Clause that provides a legal basis for preferences on conditions related to the
situation or conduct of the beneficiary developing countries.
4.28 The sole purpose of the Enabling Clause is to permit Members to "accord differential and
more favourable treatment to developing coun tries without according such treatment to [other
Members]."  The Enabling Clause provides for an exception from a fundamental principle of WTO
law and cannot therefore be interpreted to authorize measures that need not be taken to achieve that
purpose.  In order to accord treatment to developing countries that is more favourable than that
accorded to developed countries, Members need not limit their GSP preferences to a few selected
developing countries and need not accord GSP preferences conditional upon the situation or conductof the developing countries.
4.29 The Appellate Body has stated that panels should  base their interpretations on the terms of the
WTO agreements and has ruled that the process of interpretation cannot be used to introduce concepts
into an agreement that are simply not there.
29  The Enabling Clause establishes a carefully negotiated
exception from a fundamental norm of the rules-based multilateral trading system.  This requires thePanel to apply the principles of interpretation deve loped by the Appellate Body with particular care.
If the Panel were to interpret the Enabling Clause to permit developed countries to discriminate
between developing countries by making the extension of tariff preferences subject to conditions with
respect to the situation or conduct of those countries, it would introduce a concept that the drafters of
this Clause never contemplated.  The Enabling Clause would then no longer be the legal basis forGSP schemes beneficial to all developing countries but for tariff preferences under which market
access benefits are diverted from some to other developing countries to realize the foreign policy
objectives of the developed countries.  There is no clear and explicit wording on which the Panel
could base an interpretation with such serious consequences.  Furthermore, the Panel cannot adopt an
interpretation that promotes discrimination.  The Preamble to the Marrakesh Agreement Establishing
the World Trade Organization, which forms part of the "context … object and purpose"
30 of the WTO
Agreement, provides, inter alia :
"Being desirous  of contributing to these objectives by entering into reciprocal and
mutually advantageous arrangements directed … to the elimination of discriminatory
treatment in international trade relations ,"  (emphasis added)
4.30 Consequently, the Enabling Clause does not absolve the European Communities from its
obligation to accord MFN treatment to products originating in developing countries.
(d) The Drug Arrangements cannot be justified under the Enabling Clause
4.31 The Enabling Clause justifies only preferences that do not discriminate between developing
countries.  Paragraph 2(a) of the Enabling Clause authorizes preferential treatment "in accordance
with the Generalized System of Preferences".  Footnote 3 defines the term "Generalized System of
Preferences" as the system described in the 1971 Waiver relating to the establishment of "generalized,
                                                     
29 Appellate Body Report , India – Patents (US) , para. 45.
30 As used in Article 31.1 of the Vienna Convention on the Law of Treaties.WT/DS246/R
Page 12
non-reciprocal and non-discriminatory  preferences beneficial to the developing countries." (emphasis
added)
4.32 While the Enabling Clause does not establish the obligation to grant preferences, it does not
permit any preference under any scheme called GSP but only preferences accorded in the framework
of GSP schemes as described in the 1971 Waiver.  This means, inter alia , that the preferences must be
non-discriminatory between developing countries.  Developed country Members applying preferential
schemes that do not meet this requirement have often obtained a waiver.31
4.33 The preferences under the Drug Arrangements discriminate between developing countries
because they are not extended to all developing countries.  The benefits under the Drugs
Arrangements are limited to the 12 preferred Members specifically designated by the European
Communities.  The ordinary meaning of the verb "discriminate" is "to make or constitute a difference
in or between; distinguish; differentiate" and "to make a distinction in the treatment of differentcategories of people or things".
32  Hence, "non-discriminatory" preferential treatment of developing
countries means treatment that does not make a distinction between different categories of developing
countries.  Preferential tariff schemes limited to a named group of developing countries cannot be
characterized as "non-discriminatory" on any reasonable construction of this term.  By limiting the
Drug Arrangements to the 12 preferred Members, the European Communities discriminates betweendeveloping countries.
4.34 Even if the European Communities were to establish that the preferred Members are the only
developing countries that are undertaking effective programmes to combat drug production and
trafficking, the Drug Arrangements would still not be consistent with the requirement of non-
discrimination set out in the Enabling Clause.  As pointed out above, there is nothing in the EnablingClause that exempts the European Communities from the obligation under Article I:1 of GATT 1994
to extend the tariff preferences accorded under the Drug Arrangements unconditionally to all
developing countries.  GSP preferences conditional upon the beneficiaries' drug-related situation and
conduct are therefore not covered by the Enabling Clause.  Furthermore, making a distinction in the
treatment of developing countries on the basis of their drug-related situation is discriminatory.
4.35 The Enabling Clause covers only preferences that are beneficial to all developing countries
and are designed to respond positively to their needs.  As pointed out above, paragraph 2(a) of the
Enabling Clause covers only preferences that are "beneficial to the developing countries".
33  The use
of the definite article "the" with reference to "developing countries" makes clear that the GSP
schemes must benefit all developing countries.
                                                     
31 United States Caribbean Basin Economic Recovery Act waiver adopted 15 February 1985 (L/5579,
BISD 31S/20) (renewed 15 November 1995 [WT/L/104]); Canada CARIBCAN waiver adopted 26 November1986 (L/6102, SR42/4) (renewed 14 October 1996 [WT/L/185]); United States Andean Trade Preference Actwaiver adopted 19 May 1992 (L/6991) (renewed 14 October 1996 [WT/L/183 and WT/L/184]); EuropeanCommunities Fourth ACP-EEC Convention of Lomé waiver adopted 9 December 1994 (L/7604) (renewed
14 October 1996 [WT/L/186 and WT/L/187]);  European Communities – The ACP-EC Partnership Agreement
waiver adopted 14 November 2001 (WT/MIN [01]/15).
32 The New Shorter Oxford English Dictionary , 4th Edition, p. 689.
33 The Spanish and French texts of footnote 3 likewise use the definite article "the".  The Spanish text
provides:  "Tal como lo define la Decisión de las PARTES CONTRATANTES de 25 de junio de 1971, relativaal establecimiento de un 'sistema generalizado de prefer encias sin reciprocidad ni discriminación que redunde en
beneficio de los países en desarrollo'"   The French text provides:  "Tel qu'il est défini dans la décision des
PARTIES CONTRACTANTES en date du 25 juin 1971 concernant l'instauration d'un système généralisé depréférences, 'sans réciprocité ni discrimination, qui serait avantageux pour les pays en voie de développement'"
(emphasis added).WT/DS246/R
Page 13
4.36 Furthermore, paragraph 3(c) of the Enabling Clause provides:
"3. Any differential and more favourable treatment provided under this clause:
(c) shall in the case of such treatment accorded by developed contracting parties
to developing countries be designed and, if necessary, modified to respond positively
to the development, financial and trade needs of developing countries."
4.37 The requirement that the differential and more favourable treatment of developing countries
be designed to respond positively to their needs is phrased as an obligation ("shall") that developed
countries must observe when applying the preference schemes authorized under paragraph 2(a), that is
GSP schemes as described in the 1971 Waiver.
4.38 The Drug Arrangements are not beneficial to all developing countries.  As pointed out in the
introductory section of this submission, the tariff preferences accorded by the European Communities
to the 12 beneficiary countries do not involve a transfer of resources from the European Communitiesto those countries.  The main effect of the preferences is to shift market access opportunities from the
developing countries that are excluded from the regime to the countries selected by the European
Communities.  To that extent, the true "donor" under the Drug Arrangements is not the European
Communities but each of the countries in the Americas, Africa and Asia that suffers from the trade
diversion caused by the preferences.  For example,  in the case of the tariff preferences accorded to
textiles and clothing products from Pakistan, the tr ue "donor" countries are India and other developing
countries that compete directly with Pakistan's exports to the European Communities.  The tariff
preferences under the Drug Arrangements are benefici al to some developing countries and detrimental
to others and consequently do not comply with paragraph 2(a) of the Enabling Clause.
4.39 The Drug Arrangements are not designed to respond positively to the development, financial
and trade needs of developing countries.  The Drug Arrangements cover countries that are a source of
production and export of illegal drugs consumed in the European Communities.  The European
Communities depends on the cooperation of these countries to resolve its own drug problems.  The
preferences accorded under the Drug Arrangements have therefore been designed to respond
positively to the needs of the European Communities rather than those of developing countries.
4.40 In summary, there are three basic conditions that a developed country Member applying a
GSP scheme must observe:  first, the scheme must not discriminate between developing countries;
second, it must be beneficial to all developing countries;  and third, it must be designed to respond
positively to the needs of developing countries.  These conditions all have the same basic function,
namely to ensure that GSP schemes operate as instruments to promote development and not as
instruments to promote the foreign or commercial policy objectives of the developed countries.  It is
therefore important that the provisions of the Enabling Clause establishing these conditions areobserved by developed country Members that have decided to accord preferences to developing
countries.
4.41 The Drug Arrangements do not meet any of th ese conditions.  They discriminate between
developing countries because they apply only to 12 developing countries.  They are not beneficial to
the developing countries because they create market access opportunities for some of them at theexpense of others.  And, finally, they are not designed to respond positively to the needs of
developing countries but those of the European Communities.  The Drug Arrangements have for these
reasons no resemblance with the GSP sche mes authorized under the Enabling Clause.WT/DS246/R
Page 14
B. FIRST WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES
1. The Enabling Clause
(a) The Enabling Clause excludes the application of Article I:1 of the GATT
4.42 The Enabling Clause is not an "affirmative defence" justifying a violation of Article I:1.  It is
a self-standing regime which excludes the application of Article I:1.  Unlike its predecessor, theDecision of the CONTRACTING PARTIES of 25 June 1971 (the "1971 Waiver"), the Enabling
Clause is a not a temporary waiver from Article I:1 of GATT 1994.  The Enabling Clause confers an
autonomous and permanent right to grant certain types of "differential and more favourable treatment"
to developing countries "notwithstanding Article I:1 of the GATT".  This right is one of the most
important and tangible expressions of the principle of "special and differential treatment" for
developing countries included in the WTO Agreement.
4.43 Similarly, in Brazil – Aircraft  the Appellate Body held that Article 27 of the Agreement on
Subsidies and Countervailing Measures ("SCM Agreement"), a provision granting "special and
differential treatment" to developing countries with respect to export subsidies, was not an
"affirmative defence", but rather excluded the application of Article 3.1(a) of the same Agreement.
Like Article 27 of the SCM Agreement, the Enabling Clause provides "special and differential
treatment" to developing countries by conferring to all Members the right to accord certain types of"differential and more favourable treatment" to developing countries.
4.44 The fact that the Enabling Clause is not an "affirmative defence" but an autonomous right has
two important implications for this dispute, namely, first, in order to establish a violation of Article I:1
of GATT 1994, India must establish first that the Drug Arrangements are not covered by
paragraph 2(a) of the  Enabling Clause; and second, as the complaining party, India bears the burdenof proving that the Drug Arrangements are not covered by paragraph 2(a) and, if covered, that they
are inconsistent with paragraph 3(c).
(b) The Enabling Clause does not impose an obligation to accord unconditional MFN treatment
to the developing countries
(i) The Enabling Clause does not impose an obliation to grant "differential and more favourable
treatment" to all developing countries on an MFN basis
4.45 In paragraph 1 the term "developing countries" is not preceded by any qualifying term
suggesting that "differential and more favourab le treatment" must be granted necessarily to all
developing countries.  If a Member grants "differential and more favourable" treatment to some
developing countries, such treatment falls within th e ordinary meaning of the phrase "differential and
more favourable treatment to developing countries".
4.46 India's reading whereby the term "other Members" in paragraph 1 refers to "developed
countries" is not warranted by the ordinary meaning of that term.  If a Member grants preferences to
some  developing countries, any Member that does not receive such preferences (whether developed or
developing) falls within the ordinary meaning of the term "other Members".  Contextually, this is
confirmed in particular by footnote 3 to paragraph 2(a), as well as by paragraphs 2(c) and 2(d) of the
Enabling Clause.
4.47 Footnote 3 provides that the preferences granted under paragraph 2(a) must be
"non-discriminatory".  This does not imply that all developing countries must be granted identical
preferences and it does not prevent developed countries from treating differently developing countries
which, according to objective criteria, have different development needs.WT/DS246/R
Page 15
4.48 Paragraph 2(d) allows developed Members to give "special treatment" to the "least developed
among the developing countries".  This is not an "exception" to paragraph 1 but one of the types of
measures authorized by paragraph 1 as evidenced by the introductory clause of Paragraph 2.  The
"following" includes letter (d) of Paragraph 2.  Therefore, Paragraph 1 "applies" also to that letter.  If
paragraph 1 prohibited differentiation between developing countries, it would be impossible toreconcile paragraph 2(d), which expressly envisages such differentiation, with paragraph 1.
4.49 Paragraph 2(d) would not become redundant if paragraph 2(a) allowed differentiation among
developing countries.  While paragraph 2(a) is  concerned exclusively with "preferential tariff
treatment", paragraph 2(d) covers any kind of "special treatment", including therefore non-tariff
preferences.  Furthermore, paragraph 2(d) applies in the context of "any general or specific measures"
in favour of developing countries, while the preferences envisaged in paragraph 2(a) must be part of a
generalized system of preferences.
4.50 Finally, paragraph 2(c) allows developing countries to enter into "regional or global
arrangements" for the "mutual reduction or elimination of tariffs".  By definition, these "regional"
arrangements do not include all developing countries.  Thus, if paragraph 1 did not allow the granting
of "differential and more favourable treatment" to some  developing countries, the regional
arrangements mentioned in paragraph 2(c) would fall outside the scope of paragraph 1.
(ii) The Enabling Clause does not impose an obligation to grant differential and more favourable
treatment "unconditionally"
4.51 Nothing in paragraphs 1, 2 or 3 imposes an obligation to grant preferential treatment
"unconditionally".  Quite to the contrary,  such requirement could not be reconciled with footnote 3 to
paragraph 2(a) and paragraph 2(c) of the Enabling Clause.
4.52 A tariff preference is "conditional" within the meaning of Article I:1 of GATT 1994 when it is
provided in exchange for some form of compensa tion.  On the other hand, the notion of "reciprocity"
involves a mutual exchange of the same or similar benefits.  Thus, in the specific context of a trade
agreement such as the WTO Agreement, the term "r eciprocal" refers to those conditions which require
the granting of equivalent trade concessions by way of compensation for the trade benefits receivedfrom another Member.
4.53 Footnote 3 to paragraph 2(a) of the Enabling Clause only prohibits conditions of reciprocity.
It does not prohibit other conditions providing for non-reciprocal compensation.  If the preferences
granted under the Enabling Clause had to be "unconditional" in any event by virtue of Article I:1
GATT 1994, it would have been superfluous to specify in paragraph 2(a) that the preferences granted
as part of a GSP scheme must be "non-reciprocal".
4.54 Additionally, "regional or global arrangements" for the "mutual reduction or elimination of
tariffs" under paragraph 2(c) are, by definition, "conditional" because they consist of a reciprocal
exchange of tariff concessions.  If any preferences granted to developing countries under the Enabling
Clause had to be "unconditional", any "global" or "regional" arrangement entered into under
paragraph 2(c) would be in breach of Article I:1 of GATT 1994.
(iii) In any event, the Drug Arrangements are "unconditional"
The case law on the interpretation of the term "unconditionally"
4.55 The term "unconditionally" has not been interp reted yet by the Appellate Body.  It has been
addressed in two panel reports, Indonesia – Autos  and Canada – Autos , which have reached different
and conflicting interpretations.  Both interpretations are incorrect.  In Indonesia – Autos , the panel
cited a 1952 panel report, Belgian Family Allowances , which is notoriously unclear.  Belgian FamilyWT/DS246/R
Page 16
Allowances  is not relevant for the interpretation of "unconditionally" but instead for the interpretation
of the term "like".  It stands for the proposition that differences in treatment of imports cannot be
based on differences in characteristics of the exporting country which do not result in differences in
the goods themselves, because such differences do not make the goods "unlike".
4.56 The interpretation made in Indonesia – Autos  was effectively rejected in Canada – Autos .
However, the Panel also failed in this case to give meaning to the term "unconditionally" because
Article I:1 does not say that conditions must be imposed on an MFN basis, but instead that MFN
treatment must be accorded "unconditionally".  This means that certain "conditions" are prohibited
per se , irrespective of whether they are applied discriminatorily.  However, contrary to the findings of
the panel in Indonesia – Autos , the prohibited conditions are not those which are unrelated to the
imported goods, but instead those which require providing some form of compensation for receiving
the MFN treatment.
The ordinary meaning of "unconditionally"
4.57 An obligation or a right is "conditional" when its existence is dependent upon the occurrence
of a certain event as evidenced by various dictionary definitions.  Legal classifications that distinguish
among persons, things or countries based on inherent or relatively permanent characteristics are not,
properly speaking, "conditions".  Indeed, if such distinctions were considered as "conditions", all lawsor regulations would have to be characterized as "conditional" because it is in the nature of laws or
regulations to draw that kind of distinction.
4.58 The selection of the beneficiary countries of the Drug Arrangements is made by the European
Communities' authorities on the basis of an overall assessment of the gravity of the drug problem in
each developing country.  Whether or not a developing country is particularly affected by the drugproblem at the time when the selection of the beneficiaries is made is not a "future" or "uncertain"
event.  It is an existing and relatively permanen t situation which is both certain and known to the
European Communities authorities and, therefore, cannot be considered as a "condition".
4.59 India's view that treating differently, Members which are in a different "situation", amounts to
a "condition", together with India's contention th at paragraph 1 of the Enabling Clause does not
"exempt" from the obligation to accord the preferences "unconditionally", leads to an absurd result
when applied to paragraph 2(d) of the Enabling Clause.  The distinction between least-developed
countries and other developing countries envisaged by paragraph 2(d), like the distinction between
developing countries particularly affected by the drug problem and other developing countries, is also
related to the "situation" of those countries.  Thus, on India's construction, any preferences granted to
the least-developed countries would be "conditional" and, therefore, prohibited by Article I:1 of
GATT 1994.
4.60 India's interpretation of the term "unconditionally" is based upon a passage included in the
panel report in Canada – Autos , which is a mere obiter dictum insofar  as it alludes to the  situation  of
countries.  Moreover, the Appellate Body did not endorse the dictum  but neither did it address at all
the meaning of "unconditionally".
The meaning of "unconditionally" in the context of MFN clauses
4.61 In the context of MFN clauses, the term "unconditionally" alludes to a specific type of
"condition", namely to those conditions that require providing some concession by way of
compensation for receiving MFN treatment.  Article I:1 of GATT 1994  was modelled on the standard
MFN clause of the League of Nations, which in turn derived from similar clauses included in bilateral
trade agreements.  This was preceded by various "conditional" and "unconditional" treaties whichwere concluded by the United States and European countries.  The difference between the
"unconditional" and "conditional" form of the MFN clause was already explained by the U.S.WT/DS246/R
Page 17
Department of State and in the reports of the Economic Committee of the League of Nations.
Additionally, the same notion of conditional MFN is reflected in the Draft Articles on the Most-
Favoured-Nation Clause of the International Law Commission.  They distinguish between, on the one
hand, MFN clauses that are "not made subject to compensation" and, on the other hand, two types of
conditional MFN clauses: those "subject to reciprocal treatment" and those "subject to a condition ofcompensation" other than a condition of reciprocity.  The term "condition of compensation" is defined
as a "condition providing for compensation of any kind", whereas "condition of reciprocal treatment"
is defined as "condition of compensation providing for the same or, as the case may be, equivalent
treatment".
4.62 Contrary to this traditional understanding of "conditionality" the beneficiaries of the Drug
Arrangements are not required to grant any trade concessions or to provide any other compensation of
any kind to the European Communities.
(c) The Drug Arrangements are consistent with the Enabling Clause
(i) The Drug Arrangements are "non-discriminatory"
4.63 The "non-discrimination" standard set out in paragraph 2(a) is different from the MFN
standard in Article I:1 of GATT 1994.  While Article I:1 of GATT 1994 is concerned with providing
equal conditions of competition for imports from all Members, the purpose of the Enabling Clause isto promote the trade of all developing countr y Members commensurately with their respective
development needs.
4.64 Paragraph 2(a) does not prevent Members from treating differently developing countries
which, according to objective criteria, have different development needs.  Treating differently
situations that are objectively different is not discriminatory.  Different treatment may even benecessary in order to avoid indirect discrimination, as well as to comply with the requirement in
paragraph 3(c) of the Enabling Clause that the preferences must respond positively to the
development needs of developing countries.
The interpretation of the term "non-discriminatory" in paragraph 2(a)
4.65 In the English language, the verb "discriminate" has a neutral and a "negative" meaning with
the latter the most common when used in a legal context.  This is evidenced by relevant literature and
jurisprudence of international and municipal tribunals.  "Discrimination" only occurs if equal
situations are treated unequally (or if unequal situations are treated equally).  This requires
considering whether the distinction pursues a legitimate aim and whether there is a "sufficient"
connection between that objective, the nature of the distinction and the differences between the
situations concerned on which the distinction is based.
4.66 Contextually, paragraph 3(c) of the Enabling Clause refers to "development, financial and
trade needs of developing countries" which are the individual needs of those countries.  Those needs
may vary between different categories of developing countries, as well as over time.  In fact, the
provision that the preferences shall be "modified, if necessary", assumes that those needs will vary.
4.67 Additional contextual guidance is provided by Article III:4 as interpreted by US – Section 337
and Korea – Various Measures on Beef.   Equally, Article XVII of the General Agreement on Trade in
Services ("GATS") provides that the national treatment standard in that provision does not require
formally equal treatment.  These provisions illustra te that in some cases formally unequal treatment
may be required in order to achieve a given standard of equality.  The chapeau of Article XX of
GATT 1994 also confirms that in assessing the exis tence of "discrimination" between countries it
must be taken into account whether the same conditions prevail in the countries concerned.  It isimplicit in the chapeau that there is no "discrimination" if two countries are treated differently becauseWT/DS246/R
Page 18
different conditions prevail in each of them and, by the same token, that equal treatment of unequal
conditions may amount to discrimination.  This was recognized by the Appellate Body in US –
Shrimp .
4.68 Finally, Article XIII shows that in the context of the GATT formal inequality is not
synonymous with "discrimination".  The existence of discrimination must be established havingregard to the specific objective of each provision where the non-discrimination requirement is found.
The objective of the Enabling Clause is to promote the exports from the developing countries
commensurately with their respective development need s.  Having regard to that objective, it is not
discriminatory to grant additional preferences to those developing countries that have special
development needs.
4.69 The object and purpose of paragraph 2(a) the Enabling Clause is expressed in the first recital
of the 1971 Waiver, to which footnote 3 of the Enabling Clause refers as corroborated by Paragraph 3of Article XXXVI of GATT 1994 and the Preamble to the WTO Agreement.  The above provisions
set forth the objective of promoting the trade of all developing countries, and not just of the most
"competitive" amongst them.  Furthermore, the growth in trade must be commensurate  with their
development needs.  That objective is best achieved if tariff preferences are designed so as to take into
account that some developing countries have special development needs.
4.70 The European Communities' interpretation of the term "non-discriminatory" furthers the
above objectives of the Enabling Clause and the WTO Agreement because it allows providing
additional preferences to the developing countries with special development needs, so that they can
secure a share of international trade which is commensurate  with those special needs.
Treating differently the developing countries that are particularly affected by the drug
problem is not "discriminatory"
4.71 The General Assembly of the United Nations recognized that the drug problem is often
related to development problems and that those links and the promotion of the economic development
of countries affected by the illicit drug trade require, within the context of shared responsibility,
strengthened international cooperation in support of alternative and sustainable developmentactivities.  The International Narcotics Control Board (INCB) also concludes that illicit drug
production and trafficking prevents long-term growth in the developing countries affected by that
problem.  It destabilises the economy and the political system as well as the civil society.  Finally, the
United Nations International Drug Control Programme ("UNDCP") concluded that the short-term
gains of illicit drug production and trafficking "are  far outweighed by the social and economic ills
ushered in by illicit drugs", such as lower productivity, the spread of AIDS, environmental decay and
the increased risk of armed conflicts.
4.72 In order to fight effectively the drug problem it is necessary to apply a balanced approach,
which combines initiatives to reduce the illicit demand for drugs with those to reduce their illicit
supply.  In turn, the latter requires complementing the actions to eradicate illicit production and
suppress illicit trafficking with the promotion of alternative economic activities.  Trade preferences
support those alternative activities and, therefore, constitute an appropriate response to the specialdevelopment needs of those developing countries which are particularly affected by the drug problem.
4.73 This strategy is in line with the relevant UN Conventions, in particular with the 1988
Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances , which envisages
expressly that the parties may cooperate to increase  the effectiveness of efforts to control the supply
of drugs by supporting alternative economic activities.  It is also in line with the guidelines adopted bythe International Conference on Drug Abuse and Illicit Trafficking held in Vienna in 1987 or the
Political Declaration adopted by the General Assembly of the United Nations on 23 February 1990.
Of particular importance is the Action Plan on International Co-operation on the Eradication of IllicitWT/DS246/R
Page 19
Drug Crops and on Alternative Development  adopted by the General Assembly of the United Nations
in 1998 (the "1998 Action Plan").  This plan provides  that the States concerned should adopt national
crop reduction and elimination strategies and that such strategies should include "comprehensive
measures such as programmes in alternative development, law enforcement and eradication".
According to the 1998 Action Plan, "the development and implementation of alternative developmentis primarily the responsibility of the State in which illicit cultivation takes place".  Nevertheless, the
1998 Action Plan recognizes that the success of alternative development depends on the support of the
international community.  Accordingly, other St ates and the UN organizations are encouraged to
provide adequate financial and technical assistance.  As a complementary measure, other States are
also encouraged to provide greater access to their markets.
4.74 The call to provide greater market access was renewed by the General Assembly of the
United Nations in its resolution of 19 December 2001 and the resolution of the UN Commission onNarcotic Drugs of 15 March 2002.  The importance of providing greater access to international
markets has also been acknowledged in the preamble of the Agreement on Agriculture .  Finally, the
European Communities recalls that another WTO Member, the United States, grants trade preferences
to the Andean countries under the Andean Trade Preference Act ("ATPA") with the same objective as
the European Communities under the Drug Arrangements.  The ATPA was granted a waiver in 1992,that was renewed in 1996.
The application of the Drug Arrangements is "non-discriminatory"
4.75 The designation of the beneficiary countries of the Drug Arrangements is based on an overall
assessment of the gravity of the drug problem in each developing country made in accordance with
objective, non-discriminatory criteria.  That assessment takes into account the importance of theproduction and/or trafficking of drugs in each country, as measured on the basis of available statistics,
as well as their effects.  In this regard, it is recalled that the implications of the drug problem are
multifaceted.  The selection of beneficiary countries thus aims at taking into account all relevant
circumstances, including in particular:  the impact on the economic situation;  the health and
environmental impact; and the impact on the stability of the State and the civil society.
4.76 Coca products (coca leaf, coca paste, cocaine, crack, free base) and opium products (opium,
morphine, heroin) account for the bulk of the global illicit drug trade in monetary terms and are the
illicit drugs that have the most socio-economic imp act world-wide.  Accordingly, the selection of the
beneficiaries is based on data relating two those types of narcotic drugs.
4.77 The geographical patterns of drug trafficking are less stable than those of drug production.
Nevertheless, the amount of drug seizures in the various countries allows charting of certain
trafficking routes.  Thus, opiates come mainly from Afghanistan via Pakistan and Iran into theEuropean Union, while cocaine is shipped from the Andean countries to North America and the
European Union via Central America and the Caribbean.  Seizures of cocaine are concentrated in the
Americas, with the Central American and Andean countries playing a preponderant role.
4.78 The selection of the 12 beneficiary countries of the Drug Arrangements is non-discriminatory.
The relevant statistics on the production and seizures of drugs support European Communities'contention.
34
                                                     
34 First written submission of the European Communities, paras. 120-124.WT/DS246/R
Page 20
(a) The main opium production figures are as follows:35
Fig. 1  Production of opium (in metric tonnes)
1999 2000 2001 2002 (estim.) Average
Afghanistan 4,565 3,276 185 3,422 2,862
Myanmar 865 1,087 1,097 829 970
Laos 124 167 134 124 137
Colombia 88 (102) 88 88 n.a. 88 (93)
(b) The main coca leaf producers and their production figures are:36
Fig. 2  Production of coca leaf (in metric tons)
1999 2000 2001 Average
Colombia 260,995
(195,000)266,161 236,035 254,397
(232,340)
Peru 69,200
(72,500)54,400 49,260 54,903
(56,003)
Bolivia 22,800 13,400 20,200 18,800
(c) The figures for the main opium seizures are:
Fig. 3  Seizures of opium (in kgs.)37
1994 1995 1996 1997 1998 1999 2000
Iran 117,095 126,554 149,577 162,414 154,454 204,485 179,053
Pakistan 14,663 109,420 7,423 7,300 5,022 16,320 8,867
(d) The figures of the main seizures of heroin are shown as below:
Fig.4     Seizures of heroin and morphine (in kgs.)38
1994 1995 1996 1997 1998 1999 2000
Iran 13,767 13,121 11,235 20,936 25,186 28,794 26,953
Pakistan 6,444 10,760 5,872 6,156 3,364 4,974 9,492
                                                     
35 UNDCP, World Drug Report , 2000, p. 160 .; UNDCP, Global Illicit Drug Trends  2002, p. 45 et seq.
(figure in bracket is based on the World Drug Report ).  The estimates for 2002 are found in UNODC, The
Opium Economy in Afghanistan , p. 30.
36 UNDCP, World Drug Report , 2000, p. 161; UNDCP, Global Illicit Drug Trends  2002, p. 55 et seq.
(figures in brackets are based on the World Drug Report ).
37 Figures for 1994 to 1998 are from UNDCP, World Drug Report , 2000, p. 167; figures for 1999 from
UNDCP, Global Illicit Drug Trends , 2001, p. 94; and figures for 2000 from UNDCP, Global Illicit Drug
Trends , 2002, p. 80.
38  Figures for 1994 to 1998 are from UNDCP, World Drug Report , 2000, p. 168; figures for 1999 from
UNDCP, Global Illicit Drug Trends 2001 , p. 107; and figures for 2000 from UNDCP, Global Illicit Drug
Trends , 2002, p. 94.WT/DS246/R
Page 21
(e) The figures for the main cocaine seizures are:
Fig.5     Seizures of cocaine (in kgs.)39
1994 1995 1996 1997 1998 1999 2000
Colombia 69,592 59,030 45,779 42,044 107,480 63,945 110,428
Mexico 22,117 22,708 23,835 34,952 22,597 34,623 23,196
Panama 5,177 7,169 8,168 15,177 11,828 3,140 7,400
Bolivia 10,021 8,497 8,305 13,689 10,102 7,707 5,559
Peru4010,634 22,661 19,695 8,796 9,937 11,307 11,848
Guatemala 1,900 956 3,951 5,098 9,217 9,965 1,518
Venezuela 6,035 6,650 5,906 16,741 8,159 12,149 14,771
Costa Rica 1,411 1,170 1,873 7,857 7,387 1,999 5,781
Brazil 12,028 5,815 4,071 4,309 6,560 7,646 5,517
Nicaragua 1,338 1,507 398 2,790 4,750 833 961
Ecuador 1,790 4,284 9,534 3,697 3,854 10,162 3,308
El Salvador No report 65 99 234 45 38 432
Honduras 930 408 3,275 2,187 4,750 833 1,215
(ii) The Drug Arrangements are "beneficial to the developing countries"
4.79 India's argument that the use of the definite article the before the term  "developing countries"
in footnote 3 "makes clear that the GSP schemes must benefit all developing countries" is by no
means required by the ordinary meaning of footnote 3.  To say that the preferences must be
"beneficial to the developing countries" is not the same as saying that they must be beneficial to all
developing countries, let alone that they must be beneficial to each and every  developing country.
The phrase "beneficial to the developing countries" means simply that the preferences must be
beneficial to the developing countries which receive them, rather than to the developed countries
which grant them.  The question of whether preferences may be granted to some  developing countries
is specifically addressed by the requirement that preferences must be "non-discriminatory".  As shownabove, that term does not require that the same preferences be granted to each and every developing
country.
4.80 In the alternative, the European Communities submits that it would be entirely consistent with
the ordinary meaning of the phrase "beneficial to the developing countries" to consider that this
requirement is met if, overall, a preference is beneficial to all the developing countries taken together.
4.81 Furthermore, potentially, the Drug Arrangements are "beneficial" to each and every
developing country because the list of beneficiaries may be extended to cover any developing country
which, following a change of circumstances, qualifies as a country particularly affected by the
production or trafficking of drugs.
4.82 Contextually, first, the requirement that the preferences must be "non-discriminatory" does
not imply that identical preferences must be granted to all developing countries.  Yet, if the
preferences had to be "beneficial" to each and every developing country, it would be necessary to
accord identical preferences to all developing countries.  Thus, India's interpretation would render
redundant the requirement that the preferences must be "non-discriminatory".
                                                     
39 Figures for 1994 to 1998 from UNDCP, World Drug Report , 2000, p. 169; figures for 1999 and 2000
from UNDCP, Global Illicit Drug Trends  2002, p. 119 et seq .
40 According to the statistics of the Organization of American States, the figures for Peru are generally
much higher.  1995: 29,147; 1996: 20,398; 1997: 11,111; 1998: 21,989; 1999: 32,846.WT/DS246/R
Page 22
4.83 Second, footnote 3 is attached to paragraph 2(a) which refers to "preferential tariff treatment
accorded … to products originating in deve loping countries", rather than "… in the developing
countries".  In turn, paragraph 2(a) applies within the framework of paragraph (1), which authorizes
"differential and more favourable treatment to developing countries", and not to " the developing
countries".  By India's own logic, the omission of the word " the" before "developing countries" in
paragraphs (1) and 2(a) would confirm that, as argued by the European Communities, developed
countries are authorized to grant preferences to some  developing countries.  Thus, India's
interpretation of the phrase "beneficial to the developing countries" would give rise to a conflict
between footnote 3 and those two provisions.
4.84 Third, India's interpretation would prevent developed countries from responding to the
individual development needs of developing coun tries, contrary to the requirement set forth in
paragraph 3(c) of the Enabling Clause.
4.85 Finally, it is recalled that the Implementation Decision adopted by the WTO Ministerial
Conference at Doha reaffirms that "preferences granted to developing countries pursuant to the
Decision of the Contracting Parties of 28 November 1979 ('Enabling Clause') should be generalized,
non-reciprocal and non-discriminatory." The fact that the Ministerial Conference did not deem it
necessary to reaffirm that the preferences should  be "beneficial to the developing countries" is
evidence that this phrase cannot have the far-reaching implications asserted by India.  Furthermore, by
referring to "preferences granted to developing countries", rather than to " the developing countries"
the Implementation Decision provides further confirmation that preferences do not have to be granted
to each and every developing country.
4.86 India's interpretation of the phrase "beneficial to developing countries" would run contrary to
the object and purpose of the Enabling Clause and the WTO Agreement to promote the exports of
developing countries commensurately w ith their respective development needs.
(iii) The Drug Arrangements respond positively to the needs of developing countries
4.87 India's argument that the Drug Arrangements are not designed to respond positively to the
needs of developing countries is manifestly unfounded and illogical.  It amounts to saying thatbecause drug abuse is a concern of the European Communities, drug production and trafficking can
have no bearing on the development needs of the countries affected by that problem.  This is an
obvious non-sequitur .
4.88 There is a close link between drugs and development, with the consequence that the countries
which are particularly affected by the drug problem have special development needs.  As
demonstrated above, the Drug Arrangements have been designed to respond to those needs by
supporting alternative economic activities, a strategy which is in conformity with UNrecommendations.
4.89 Furthermore, the European Communities recalls that the Agreement on Agriculture has
recognized that providing greater access to the markets of the developed countries is an appropriate
response to the particular development needs of the countries most affected by the drug problem.
4.90 It is recalled also that, when granting the ATPA waiver, the WTO recognized expressly that
those preferences responded to the development needs of the beneficiary countries.  There is no
fundamental difference between the ATPA preferences and the European Communities' Drug
Arrangements, other than the country coverage, and, therefore, no valid reason to consider that the
Drug Arrangements, unlike the ATPA preferences,  do not respond to the development needs of the
beneficiaries.WT/DS246/R
Page 23
2. Article XX(b) of GATT 1994
(a) Introduction
4.91 In the event that the Panel were to find that the Drug Arrangements fall outside the scope of
paragraph 2(a) of the Enabling Clause, or that they  are inconsistent with paragraph 3(c), the European
Communities submits that the Drug Arrangements would be justified under Article XX(b) of GATT1994 as being necessary for the protection of human life or health in the European Communities.
(b) The Drug Arrangements are necessary for the protection of human life or health
(i) Drugs pose a risk to human life or health
4.92 The European Communities considers to be beyond dispute that narcotic drugs pose a risk to
human life or health in the European Communities.  Indeed, as recognized by the General Assembly
of United Nations, "drugs are a grave threat to the health and well-being of all mankind".  The
narcotic drugs which are produced in, or which transit through, the territories of the beneficiarycountries, i.e. coca products (coca leaf, coca paste, cocaine, crack, free base) and opium products
(opium, morphine, heroin) pose particularly serious risks to human life and health as described by the
United Nations Office on Drugs and Crime ("UNODC").
4.93 According to the European Monitoring Centre for Drugs and Drugs Addiction (the
"EMCDDA"), between 7,000 and 8,000 direct or "acute" drug-related deaths are reported every yearin the whole of the European Communities.  To this must be added a much larger number of indirect
drug related deaths, which are the consequence of associated risks, such as infectious diseases
acquired through a drug using habit/way of life, e.g.  HIV/AIDS, complications arising from an
infection acquired through long-term drug misuse, e.g.  hepatitis causing liver failure, violent deaths
related to the supply and/or use of illegal drugs and accidents (including road traffic accidents) arisingfrom impaired judgement as a result of the consumption of drugs.
4.94 The EMCDDA has estimated that, as a result of the direct and indirect risks posed by drugs,
the overall mortality rate among problem drug users in the European Communities is up to 20 times
higher than among the general population of the same age.
4.95 The concern with the health and other social problems caused by narcotic drugs is universal
and has led to the adoption of a comprehensive system of international control of those substances.
At present, that system is based on the Sing le Convention on Narcotic Drugs, 1961, as amended by
the 1972 Protocol (the "1961 Convention") and the Convention against the Illicit Traffic in Narcotic
Drugs and Psychotropic Substances of 1988 (the "1988 Convention").  As India is also a party to the
1961 and the 1988 Conventions, India would be estopped from arguing in this dispute that narcotic
drugs do not pose a serious risk to human health or life for the purposes of Article XX(b).
(ii) The Drug Arrangements are "necessary" to fight drug production and trafficking
The "values" pursued by the Drug Arrangements
4.96 The Appellate Body held in Korea – Various Measures on Beef  that "the more vital or
important the common interests or values pursued, the easier it would be to accept as necessary the
measures designed to achieve those ends".  As emphasized by the Appellate Body in EC – Asbestos ,
the preservation of human life and health is "both vital and important in the highest degree".Accordingly, in the present case the term "necessary " should be interpreted by the Panel according to
its broadest possible meaning.WT/DS246/R
Page 24
Contribution of the Drug Arrangements to the protection of human life and health
4.97 The Drug Arrangements contribute to the objective of preserving the life and health of the
European Communities' population against the risks from the consumption of narcotic drugs by
supporting the measures taken by other countries against the illicit production and trafficking of those
substances, thereby reducing their supply to the European Communities.
4.98 There is a clear link between drug control and economic development as recognized by the
General Assembly of United Nations and the INCB.  The Drug Arrangements take account of that
link.  They seek to promote the development of alternative economic activities to replace illicit drug
production and trafficking and, more generally, to raise the overall level of economic development of
the countries concerned, so as that they can generate the resources and capacity required for enforcing
an effective system of drug control.
4.99 The Drug Arrangements are embedded in a strategy that encompasses four different but
related types of actions:  (i) reducing the demand of drugs, through prevention, treatment and
rehabilitation;  (ii) preventing drug supply through law enforcement action;  (iii) reducing illicit
cultivation by actions such as the promotion of alternative development;  and (iv) promoting
international cooperation.  Technical and financial assistance to the developing countries affected by
drug production or trafficking does not render the Drug Arrangements unnecessary but rather theDrug Arrangements are a necessary complement to such technical and financial assistance.
Trade impact of the Drug Arrangements
4.100  As required by paragraph 3(a) of the Enabling Clause, the Drug Arrangements have been
designed to promote trade from the beneficiary countries and not to raise barriers to the trade of other
countries.  There is no evidence that, in practice, the Drug Arrangements have displaced imports fromother developing countries to any significant extent.  The trade preferences granted under the Drug
Arrangements are also subject to the general "graduation" mechanism provided for in the GSP
Regulation.
(c) The Drug Arrangements are applied consistently with the chapeau
4.101  The chapeau of Article XX establishes three standards regarding the application of measures
for which justification under Article XX may be sought.  First, there must be no arbitrary
discrimination between countries where the same conditions prevail; second, there must be no
unjustifiable discrimination between countries where the same conditions prevail;  and third, there
must be no disguised restriction on international trade.  These three standards, while distinct, must "be
read side-by-side" and "impart meaning to one another".
4.102  The standards embodied in the chapeau are different from the standard used in determining
whether a measure violates the substantive rules of the GATT ( in casu  the Enabling Clause) as
observed by the Appellate Body in US – Shrimp .  The standards embodied in the chapeau are also
different from the standard used in determining whether the measure is provisionally justified under
one of the particular exceptions listed in Arti cle XX.  As emphasized by the Appellate Body in US –
Gasoline , the chapeau is not concerned with the measure for which justification is sought but instead
with the application  of such measure.  According to the Appellate Body, the general structure and
design of the measure and its declared policy objective must be examined under the exception listed
in Article XX and not under the chapeau.  In turn, when considering the chapeau, the treaty interpreter
must determine whether the application of a measure provisionally justified under one of the
exceptions listed in Article XX constitutes an abuse or misuse of such provisional justification.WT/DS246/R
Page 25
(i) Arbitrary or unjustifiable discrimination
4.103  In this case, India's allegations do not relate to the "application" of the measure but it is the
essential substantive feature of the "structure and design" of the measure in dispute.  Therefore, the
alleged discrimination between the two categories of  developing countries is irrelevant for the
purposes of the chapeau.  In any case, however, the designation of the beneficiary countries of theDrug Arrangements is made according to objective, non discriminatory criteria.  An inclusion of
least-developed countries and other developing countries which are parties to the Cotonou Agreement
or to bilateral free-trade agreements with the European Communities would have been pointless
because they already benefit from duty-free access under these regimes.  Equally, developed countries
are not included because the "prevailing conditions" in developed countries are not the same as those
prevailing in developing countries.  Procedural as pects of granting and withdrawal of the special
preferences are also non-discriminatory.
(ii) Disguised restriction
4.104  Any restriction on imports from developing countries not especially affected by the drug
problem which are an inherent effect of the exclusion of that category of countries from the Drug
Arrangements cannot be relied upon in order to establish that the application  of the Drug
Arrangements leads to a "disguised restriction" of trade.  Instead, in order to establish that the Drug
Arrangements fail to comply with that standard, it would have to be shown that imports from India are
restricted because, as a matter of application  of the Drug Arrangements, India has been unduly
excluded from the list of beneficiaries of the Drug Arrangements even though it qualifies as a country
that is especially affected by the drug problem.  However, the selection of the beneficiaries of the
Drug Arrangements has been made according to objective, non-discriminatory criteria.
C. 
ORAL STATEMENT OF INDIA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL
1. Procedural arguments
(a) Joint representation of India and Paraguay by the same staff of the Advisory Centre on WTO
Law
4.105  On the issue raised by the European Communities on 14 May 2003 during the first
substantive meeting of the Panel, whether India and Paraguay can be represented by the same staff of
the Advisory Centre on WTO Law ("ACWL"), India and Paraguay submitted a joint statement on this
issue to the Panel on the same day.  India claims that it had full notice of the representation granted to
Paraguay as a third party by the ACWL in this dispute.  Likewise, Paraguay had full notice of the
representation granted to India as a complaining party.  India and Paraguay consider that by
representing both parties, the ACWL does not compromise their individual interests in effective legal
representation.  India and Paraguay had both consented to simultaneous representation by the ACWLin this dispute.
4.106  India and Paraguay contend that the issue of exchange of information between parties and
third parties to which the European Communities referr ed in its statement does not arise in the present
case because the third parties were accorded enhanced rights.
4.107  India and Paraguay maintain that the dispute settlement procedures of the WTO establish
rules of ethics for the members of panels and the Appellate Body but not for lawyers representing the
Members of the WTO.  Under the current law of the WTO, the request of the European Communities
that the Panel rule on a matter of legal ethics therefore lacks any legal basis and should be rejected by
the Panel.WT/DS246/R
Page 26
4.108  India argues that according to Articles 2.2 and 6.1 of the Agreement Establishing the
Advisory Centre on WTO Law, both India and Paraguay are entitled to the support of the ACWL in
WTO dispute settlement proceedings, whether as parties or third parties.  Citing the Appellate Body
ruling in EC – Bananas III  that it "can find nothing in the … WTO Agreement, the DSU or the
Working Procedures, nor in customary international law or the prevailing practice of internationaltribunals, which prevents a WTO Member from determining the composition of its delegation in
Appellate Body", India contends that this observ ation applies equally to the composition of the
delegation in panel proceedings.
2. Substantive arguments
4.109  According to India, it was with extreme reluctan ce that it decided to invoke dispute settlement
proceedings in this case.  India made repeated attempts to settle the issue bilaterally with the European
Communities, but its inability to reach a settlement and the considerable losses  faced by its industry
left India with no choice but to invoke these proceedings.  India resorted to these procedures only
after having exhausted all possibilities to reach a mutually agreed solution.
4.110  India recognizes the need for special financial assistance to developing countries to meet their
individual development needs.  However, it does not believe that tariff preferences discriminating
between developing countries are the appropriate policy instrument to address the specificdevelopment needs of individual countries.  Such preferences tend to help some poor countries at the
expense of others, equally poor.  The GSP was not created to shift market access opportunities
between poor countries with different development needs, but to respond to the development needs of
all of them.
4.111  India's textiles and clothing exporters started feeling the adverse effects of the Drug
Arrangements in the year 2002, when Pakistan was included in these arrangements.  These problems
are not yet fully reflected in the trade statistics because only 16 months have lapsed since the
inclusion of Pakistan.  However, in India's view, the WTO legal system focuses on the conditions of
competition for WTO Members, not trade results.
4.112  The European Communities, India and the beneficiary countries are in agreement that the
GSP preferences that may be accorded under paragraph 2(a) of the Enabling Clause must be
"non-discriminatory  preferences beneficial to the developing countries".  India submits that the Drug
Arrangements do not meet this requirement because the preferences accorded under them are
available only to products originating in specified countries.  On the contrary, the European
Communities contends that the term "non-discriminatory" does not prevent it from treating
beneficiaries differently because, according to objective criteria, they have different development
needs as a consequence of drug problems.
4.113  The European Communities' argument is based on two premises:  first, that the term "non-
discriminatory" in the Enabling Clause allows de veloped countries to distinguish between developing
countries on the basis of objective criteria relating to specific development needs of individual
countries;  and second, that the European Communities in fact distributes the benefits accruing under
the Drug Arrangements in accordance with objective criteria.
4.114  The meaning of the term "non-discriminatory" as used in paragraph 2(a) of the Enabling
Clause must be determined in accordance with the ordinary terms of GATT 1994, in their context and
in the light of its object and purpose.  On the basis of these principles, the Appellate Body has found
that: "The essence of the non-discrimination obligations is that like products should be treated
equally, irrespective of their origin […].  Non-discrimination obligations apply to all imports of likeWT/DS246/R
Page 27
products, except when these obligations are specifically waived or are otherwise not applicable as a
result of the operation of specific provisions of the GATT 1994."41
4.115  The Enabling Clause is an integral part of the GATT 1994, and it therefore follows from this
finding of the Appellate Body that, in the context of the Enabling Clause, non-discrimination means
equal treatment of like products, except if a specific provision of the Enabling Clause states otherwise.
The basic legal issue before the Panel therefore is:  does the Enabling Clause provide for a definition
of the term "non-discrimination" that is different from the definition generally applicable in the
GATT 1994?
4.116  The European Communities argues that an inte rpretation of paragraph 2(a) of the Enabling
Clause permitting developed countries to treat countries differently that have different development
needs is supported by paragraph 3(c) of the Enabling Clause, which obliges developed countries to
"respond positively to the development, financial and trade needs of developing countries".  TheEuropean Communities claims that the needs of developing countries needs referred to in this
paragraph are "the individual  needs of those countries".  On this basis, it claims that the requirement
to respond positively to the individual needs of each developing country would be rendered a nullity if
"non-discriminatory" were interpreted as prohibiting any difference in treatment between developing
countries.
4.117  There is nothing to support the contention that paragraph 3(c) refers to the individual  needs of
each of the developing countries, and the text of paragraph 3(c) does not express this idea.  In the
context of the requirements governing GSP preferences, the drafters of the Enabling Clause referred
to the needs of developing countries in general.  In the context of the reciprocity principle governing
trade negotiations, they referred to the "individual" or "particular" needs of developing countries.This comparison leaves no doubt that the drafters intended to stipulate that GSP schemes respond to
the needs of developing countries in general and that each developing country's individual needs
would be taken into account in determining the degree of reciprocity in trade negotiations.
4.118  There is also nothing to support the Europ ean Communities contention that paragraph 3(c)
would be rendered a nullity if differences in trea tment between developing countries were prohibited.
A GSP scheme can be non-discriminatory and nevertheless not respond positively to the needs of
developing countries in general.  It made perfect sense for the drafters to require that benefits to be
accorded on a non-discriminatory basis to the developing countries respond positively to the needs of
these countries.
4.119  The European Communities assertion that a scheme designed exclusively to address drug
problems responds to the needs of developing countries as defined in paragraph 3(c) cannot also be
reconciled with the fact that, throughout the Enabling Clause, the needs of developing countries aredefined as the "development, financial and trade needs".  The conjunctive term "and" makes clear
that, when evaluating the consistency of a GSP sc heme with paragraph 3(c) or the degree of non-
reciprocity to be accorded to a developing country under paragraphs 5 and 6, the development,
financial and the trade needs have to be assessed collectively.  The drafters did not create the option of
responding either  to development or to financial or to trade needs because they did not use the term
"or".  This logically implies that they also did not create the option of responding to one specific
development need, such as the need to fight drug production and trafficking.
4.120  Finally, it must be recalled that paragraph 3(c), by its own terms, does not create a right but
establishes an obligation.  If the European Communities' interpretation were correct, this provision
would oblige  developed Members to design their GSP schemes to respond to the individual  needs of
each of the beneficiary countries.  They would thus be under a legal obligation to modulate all
benefits accruing under their GSP schemes to the individual needs of each of the beneficiaries.
                                                     
41 Appellate Body Report, EC – Bananas III , paras. 190-191.WT/DS246/R
Page 28
However, most of the benefits accruing under the general GSP arrangements of the European
Communities are equally available to all developing countries and consequently would not meet such
an obligation.  In its attempt to justify one of its special GSP arrangements, the European
Communities therefore asks the Panel to adopt an interpretation of paragraph 3(c) that would render
its general GSP arrangement inconsistent with the Enabling Clause.
4.121  The European Communities further asserts that various provisions of the GATT 1994 and the
GATS that implement the principle of non-disc rimination support its claim that the Drug
Arrangements are "non-discriminatory" within the meaning of paragraph 2(a) of the Enabling Clause.
This assertion also does not withstand scrutiny.
4.122  There are three basic provisions of the GATT that implement the principle of
non-discrimination between products originating in different countries.  Each of these provisions
establishes a specific standard of non-discrimination for a specific policy instrument:
(a) Article I of the GATT subjects the use of tariffs to the most-favoured-nation standard.
A WTO Member can meet this standard only if it applies the same tariff to like
products of all other Members of the WTO.  The standard of non-discrimination
established by the GATT for tariffs is therefore formally equal treatment.
(b) Article XIII regulates the use of quotas, including the use of country-specific quotas.
It requires Members that administer quotas to aim at a distribution of trade
approaching as closely as possible the shares which the other Members might be
expected to obtain in the absence of the quotas, for instance by basing the quota
distribution on a previous representative period.  The standard of non-discriminationis thus not formally equal treatment but treatment that ensures that the quotas do not
modify each Member's trade share.
(c) Article XVII regulates imports and exports of state trading enterprises.  It requires
Members to ensure that such enterprises act in a manner consistent with the principlesof non-discriminatory treatment.  This is understood to require that these enterprises
make their purchases and sales solely in accordance with commercial considerations.
4.123  While each of these three provisions sets a different standard, they all have one common
objective, namely, to ensure that like products or iginating in different countries are accorded equal
competitive opportunities.  In the case of tariffs, this objective is achieved by requiring formally equal
treatment; in the case of quotas, by stipulating a distribution of trade equal to the distribution thatwould prevail without the quotas; and in the case of state trading enterprises, by requiring that
purchases and sales be based on considerations equal to those that private enterprises would apply.
4.124  Further, the non-discrimination rules also set out in the national treatment provisions of the
GATT 1994 and GATS have equality of competitive opportunities as their fundamental objective.  It
is clear from the jurisprudence under the GATT 1994 and the text of the GATS that the nationaltreatment requirement can be achieved through formally identical or formally different treatment.
However, it is equally clear that either method must result in an effective equality of competitive
opportunities.
4.125  The non-discrimination provisions of the GATT governing tariffs thus provide no contextual
support for an interpretation of the term non-discrimination in paragraph 2(a) in the Enabling Clausethat would justify the Drug Arrangements.  This paragraph deals with the tariff treatment  of products
originating in developing countries.  In respect of tariffs, non-discrimination means formally equal
treatment of like products.  The standard of non-discrimination that the European Communities
invites the Panel to adopt in respect of tariff trea tment of products originating in developing countries
applies nowhere in WTO law to tariff treatment.WT/DS246/R
Page 29
4.126  The European Communities' statement that the non-discrimination provisions of the GATT
governing non-tariff measures, such as import quotas or internal regulations, permit or even require
formally different treatment of like products is co rrect.  However, the result of any difference in
treatment must in all cases be an effective equality of conditions of competition between like
products, irrespective of their origin.  The preferential tariff treatment accorded under the DrugArrangements establishes conditions of competition favouring products from the beneficiary countries
over products from other countries, and is therefore also discriminatory within the meaning of the
non-discrimination provisions governing non-tariff measures.  In addition, these provisions cannot
lead the Panel to the interpretation of paragraph 2(a) advanced by the European Communities.
4.127  Paragraph 2(a) defines the GSP schemes authorized by the Enabling Clause by referring to
the 1971 Waiver, and the 1971 Waiver in turn refers to the Agreed Conclusions of the Special
Committee on Preferences adopted at the Fourth Special Session of the Trade and DevelopmentBoard of the UNCTAD.  As India will further de monstrate in its rebuttal submission, the Agreed
Conclusions clearly envisage that the benefits of the GSP schemes should be made available to all
beneficiary countries.  This understanding of the Agreed Conclusions is confirmed by the fact that,
prior to the adoption of the Agreed Conclusions, the developed countries had agreed among
themselves in the OECD that their preferences w ould not discriminate between developing countries,
except to favour the least-developed countries.
4.128  As India noted at the beginning of its statement, according to the Appellate Body,
non-discrimination means equal treatment of like products except if a specific provision states
otherwise.  The simple fact is that, except for the provisions governing preferences for
least-developed countries, there is no provision in the Enabling Clause that lends any support to theconclusion that the terms "non-discriminatory preferences beneficial to the developing countries" in
paragraph 2(a) of the Enabling Clause do not require equal treatment of like products from all
developing countries.
4.129  Turning to the factual premises under the European Communities' argumentation.  India
strongly rejects the European Communities' claim that the Enabling Clause permits the developedcountries to differentiate between developing countries, on the basis of objective criteria of their own
choice which are allegedly vital to the development needs of developing countries.  Nevertheless,
assuming arguendo that differentiation between developing countries is permissible, the European
Communities' argumentation could only succeed if its factual claim were correct – that the Drug
Arrangements differentiate between developing countries on the basis of objective criteria reflecting
their development needs.
4.130  The EC Regulation establishing the current European Communities' GSP scheme provides for
two special arrangements to which the European Communities' factual claim might possibly apply:
the labour arrangements and the environmental arrangements.
42  In respect of the Drug Arrangements,
no criteria or procedures for inclusion as a beneficiary are set out in the Regulation.  Instead,
Article 10 of the Regulation merely provides that the preferences are granted to countries that are
designated by the European Communities as beneficiaries in column I of Annex I.  The beneficiariestherefore do not know what criteria they have to meet in order to continue to be beneficiaries.  There
are also no provisions establishing criteria to be met and procedures to be followed in order to be
designated as a beneficiary.  Countries excluded from the scheme consequently do not know why they
are excluded and under what circumstances they would be included.  The European Communities'
claim that the measures at issue in these proceedings distinguish between developing countriesaccording to objective criteria reflecting their individual development needs is therefore factually
baseless.
                                                     
42 India fully reserves its position on the legal status and factual characterization of these special
arrangements.WT/DS246/R
Page 30
4.131  The measures at issue in this proceeding are the Drug Arrangements as they presently
operate .  The issue is therefore whether the Drug Arrangements  as set out in the current Regulation
establish "non-discriminatory preferences beneficial to the developing countries" within the meaning
of paragraph 2(a) of the Enabling Clause.  The motives of the European Communities in selecting the
beneficiaries and the criteria that the European Communities might adopt in the future when addingfurther beneficiaries are consequently not relevant to  the legal examination of the measures before the
Panel.
4.132  India would nevertheless like to point out that the European Communities has provided no
evidence that the selection of the current beneficiaries was based on objective criteria.  Moreover, the
European Communities submits no evidence whatsoever demonstrating that the countries excluded
from the scheme do not have similar drug problems.  In its submission, it describes the drug problems
of the beneficiaries in general terms, partly by using statistics that became available after thebeneficiaries had been selected.  On the basis of the European Communities' explanations, it is
impossible to determine why for instance Pakistan was included while India and Paraguay were
excluded.  Nor has the European Communities submitted any documentary evidence that it had in fact
conducted an objective assessment of all countries' drug problems before establishing the list of
beneficiaries.  All it has submitted to the Panel is a lengthy ex post  justification prepared with the help
of UN documents that does not reveal a single objective criterion equally applied to all beneficiaries
and non-beneficiaries.
4.133  India also notes that there are some fundamental contradictions between the alternative
defences advanced by the European Communities in its written submission.  The European
Communities argues that the Drug Arrangements are entirely consistent with all of the requirementsof the Enabling Clause, including presumably the requirement that any such arrangement must be
non-reciprocal in nature.  At the same time, however, the European Communities also argues that, in
the event that the Panel finds the Drug Arrangements to be inconsistent with the Enabling Clause, it
would like to defend it as being necessary to protect human life and health in the European
Communities under Article XX(b) of GATT 1994.  Thus, the European Communities in effect admitsin its written submission that the Drug Arrangements are really intended to achieve a fundamental and
important policy objective of its own, without reference to the development needs of the beneficiaries
of the Drug Arrangements.  Therefore, the design, architecture and structure of the Drug
Arrangements contain an important element of reciprocity, which is clearly impermissible under the
Enabling Clause.  This is just one more instance of the contradictions inherent in the European
Communities' arguments before the Panel.
4.134  The claims and arguments presented by the European Communities and the beneficiaries are
legally and factually unfounded.  The European Communities knew and acknowledged that the Drug
Arrangements required a waiver.  The European Communities failed to obtain the waiver and the
Panel is now facing the most spurious arguments in support of a ruling that could only be described as
preposterous, namely that the denial of tariff preferences to India does not constitute discrimination
against India.
4.135  Both the European Communities and the beneficiary countries have permitted their lawyers to
advance arguments on important systemic issues that run counter to the views that they have
expressed on other occasions.  It is difficult to believe that the arguments that the European
Communities presented on the unconditional nature of the most-favoured-nation principle and on
Article XX(b) represent the considered opinion of the European Communities as a whole.  It isequally difficult to believe that the beneficiary countries took their long-term systemic interests into
account when they invited the Panel to rule that developed countries may discriminate between
developing countries in accordance with criteria selected by the developed countries.
4.136  India is profoundly disturbed by the European Communities' abuse of the WTO dispute
settlement procedures in this case and the surprising support given by the beneficiary countries to theWT/DS246/R
Page 31
European Communities' interpretation of the Enabling Clause.  India urges the Panel to preserve the
integrity of the dispute settlement process and to make quickly the required clear ruling so that the
issues to which the Drug Arrangements give rise can be resolved within the framework of the proper
WTO procedures.
4.137  In conclusion, India reiterates that it does not dispute the European Communities' right to give
financial assistance to individual developing count ries facing special development needs.  India
disputes the European Communities' right to do so at the expense of other developing countries facing
different but equally pressing needs.  The European Communities' claim that the Enabling Clause
provides authority to shift market access opportunities from some poor countries to other poor
countries in accordance with criteria selected by the developed countries is legally untenable.  The
GSP was intended to promote the development of all developing countries.  It was not intended to
permit developed countries to discriminate between developing countries, to destroy or adverselyaffect industry in one developing country to benefit another and to create poverty in one developing
country in order to alleviate poverty in another.  A confirmation of this obvious fact by the Panel will
have a salutary effect on the entire multilateral trading system.
D. 
ORAL STATEMENT OF THE EUROPEAN COMMUNITI ES AT THE FIRST SUBSTANTIVE MEETING OF
THE PANEL
1. Procedural arguments
(a) Joint representation of India and Paraguay by the same staff of the Advisory Centre on WTO
Law
4.138  During the first substantive meeting of the Panel, the European Communities raised the issue
of joint representation of India, the complaining party and Paraguay, one of the third parties by thesame staff of the ACWL.  The European Communities requests the Panel to clarify the issue of
whether, as a matter of principle, the same counsel can represent simultaneously a complaining party
and a third party, and if  so, under what conditions and whether these conditions are satisfied in this
case.
4.139  While acknowledging that the Appellate B ody ruled only on the issue of who should
represent a Member at its oral hearing in EC – Bananas III , not on the issue of whether the same legal
counsel may represent two Members with different positions, the European Communities considers
that the joint representation of a party and a third party by the same legal counsel is unprecedented.
This situation draws a number of concerns that deserve the attention of the Panel.
4.140  The European Communities contends that there is an obvious conflict of interest.  The bar
rules of many WTO Members prohibit lawyers from representing in litigation two clients with
different interests.  The absent of any agreed rules in the WTO concerning the representation ofMembers by external counsel does not mean that such counsel is not subject to any deontological
rules.  Under the existing WTO law, there is no requirement that the counsel appearing before a panel
must be admitted to the bar of a WTO Member.  In view of that, the European Communities considers
that panels must take upon themselves the task of enforcing basic deontological standards, including
the conflict of interest issue, as part of their i nherent powers to organize and direct the proceedings.
4.141  The European Communities states that it is not suggesting that there is necessarily a conflict
of interest in this case.  Rather, the European Communities' view is that the situation where the same
counsel represents the complaining party and a third party may give rise to such conflicts and that
panels should satisfy themselves that the counsel and the Members concerned have done all that is
necessary to avoid them.WT/DS246/R
Page 32
4.142  The European Communities maintains that the situation where the same counsel represents
two Members with different procedural positions may be incompatible with the DSU rules on
confidentiality.  The counsel for a complaining party will receive confidential submissions and panel
documents which it would not be entitled to receive as the counsel for a third party.  In this case, the
problem is mitigated by the fact that third parties have been granted enhanced rights.  But theEuropean Communities is worried about creating a precedent for other cases where, in accordance
with the general rule, the information rights of third parties are limited.  In response to the argument
that India and Paraguay submitted to the Panel that the issue of confidentiality does not arise in this
dispute as the third parties have been accorded enhanced  rights, the European Communities points
out that India and Paraguay had already agreed to use the service of the same legal counsel long
before third parties requested the enhanced third-party rights.
4.143  It is the view of the European Communities that generally speaking, allowing the same
counsel to represent the complaining party and a third party would be a source of confusion and could
effectively blur the distinction between the main parties and the third parties, which, as recently
recalled by a panel, is still a basic feature of the DSU rules.
2. Substantive arguments
(a) The implications of this dispute
4.144  The European Communities points to the importance of this dispute.  It is the first dispute
involving the Enabling Clause, one of the most significant forms of "special and differential"
treatment for developing countries under the WTO Agreement.  At stake in this dispute is more than
the Drug Arrangements, vital as they are for the beneficiary countries.  From the Panel's answers to
some of the issues raised in this dispute it could decide also the viability of the Generalized Systems
of Preferences ("GSP") applied by many donor countries.
4.145  When considering those issues, the Panel should bear in mind the nature of the preferences
granted under the GSP schemes.  Those preferences are strictly voluntary.  According to the European
Communities, India's reading of the Enabling Clau se would be detrimental to all Members.  The
likely result of India's interpretation would be less, rather than more  preferences for the developing
countries, contrary to India's misguided expectations in bringing this case.  In fact, turning the
Enabling Clause into the kind of strait-jacket devised by India could dissuade some donor countries
from providing any preferences at all .
4.146  Beyond its systemic implications, the present dispute is important also because of its potential
repercussions for the beneficiaries of the Drug Arrangements.  The Drug Arrangements have allowed
those countries to increase and diversify their exports to the European Communities.  The ensuing
beneficial effects are considerable.  For example, it has been estimated that in the Andean Community
alone, the Drug Arrangements sustain almost 160,000 jobs.
4.147  Removing the Drug Arrangements from the European Communities' GSP would have
devastating economic and social consequences for the beneficiary countries.  In contrast, India would
derive very few benefits, if at all.  As we have shown, India's allegations of trade diversion are
unsubstantiated and groundless.  Between 1990 and 2001, imports from India under the European
Communities' GSP increased from two to more than five billion Euros.  Further, during that period,
India's share of all imports under the European Communities' GSP increased from 9 per cent to 12 per
cent.  This makes India the second largest beneficiary of the European Communities' GSP.
4.148  India can invoke no genuine trade concern as a justification for bringing this dispute.  The
European Communities, therefore, finds it very difficult to understand why India has resorted to anaction that could undermine the efforts of other developing countries in their fight against drugs and
endanger their social and political stability.  India's gratuitous complaint is hardly what would beWT/DS246/R
Page 33
expected from a Member which aspires, with good reason, to be one of the leaders of the developing
country Members of this Organization.
(b) The Enabling Clause
4.149  India's complaint is built on a mistaken premise.  India has misconceived the relationship
between the Enabling Clause and Article I:1 of GATT 1994.  The Enabling Clause is not an"affirmative defence".  It is a self-standing regime.  It confers an autonomous and permanent right to
grant certain types of "special and more favourable treatment" to developing countries, subject to
certain conditions.  If a preference falls under the Enabling Clause, Article I:1  of GATT 1994 does
not apply at all.
4.150  India is one of the main proponents of strengthening the provisions granting "special and
differential treatment" to developing countries.  It is therefore astonishing to see that in this dispute
India takes a position that would erode considerably the value of such treatment.  The EuropeanCommunities invites India to reflect further on this issue in the light of its broader WTO interests.
4.151  The fact that the Enabling Clause is not an affirmative defence has two important
implications:
(a) in order to establish a violation of Article I:1 of GATT 1994, India must
establish first that the Drug Arrangements do not fall within the scope ofparagraph 2(a) of the  Enabling Clause; and
(b) as the complaining party, India bears the burden of proving that the Drug
Arrangements are not covered by paragraph 2(a) and, if covered, that they are
inconsistent with paragraph 3(c).
4.152  The Enabling Clause has its own requirements, wh ich are different from those of Article I:1
of GATT 1994.  Unlike Article I:1, the Enabling Clause does not require granting identical tariff
preferences to all the developing countries, on a MFN basis.  Instead, paragraph 2(a) provides that the
tariff preferences granted to developing countries as part of a GSP must be "non-discriminatory".
4.153  The "non-discrimination" standard included in  paragraph 2(a) is different from the MFN
standard of Article I:1.  The term "non-discriminatory" must be interpreted in accordance with its ownordinary meaning, in its own context and in the light of the specific objective of the Enabling Clause,
which is also one of the overall objectives of the WTO Agreement: to promote the trade of all
developing countries commensurately  with their respective development needs.
4.154  India's interpretation of the term "non-discriminatory" is based on little else than an
incomplete dictionary definition.  It is simplistic and incorrect.  Treating differently developing
countries which, according to objective criteria, have different development needs is not
discriminatory.  Quite to the contrary, it may be necessary to comply with paragraph 3(c) of the
Enabling Clause, which provides that preferences must respond positively to the development needs
of developing countries.
4.155  India's allegations that the Drug Arrangements have been designed in order to advance the
European Communities' political agenda or to promote the European Communities' own trade
interests are groundless.  The purpose of the Drug Arrangements is to afford equal developmentopportunities to the developing countries which are handicapped as a result of being severely affected
by the production or trafficking of drugs.  That goal is both legitimate and consistent with the
objectives of the Enabling Clause and of the WTO Agreement.  Further, the European Communities
has demonstrated that there is a reasonable and sufficient connection between that objective, theWT/DS246/R
Page 34
unique development needs of the countries concerned, and the tariff preferences granted to those
countries under the Drug Arrangements.
4.156  The links between economic development and the drug problem are well-established and
have been recognized many times by the United Nations.  Only last month the ministers participating
in the 46th session of the UN Commission on Narcotic Drugs recalled once again that the drug
problem "undermines socio-economic and political stability and sustainable development, including
efforts to reduce poverty".
4.157  Likewise, the United Nations has said many times that the fight against drug production and
trafficking is a shared responsibility of all member s of the international comm unity.  Accordingly, the
developed countries must provide assistance to the developing countries which are affected by that
problem.  The provision of financial and technical assistance is, of course, crucial.  But it is not
enough.  According to the United Nations, the fight against drugs demands a balanced andcomprehensive approach.  Drug production and trafficking are fed by poverty and unemployment.
Thus, in order to combat them successfully, it is  necessary to replace them with licit alternative
economic activities.  Further, those activities must be sustainable.  In turn, this requires providing
markets for the products of those activities.
4.158  The concrete application of the Drug Arrangements made by the European Communities'
authorities is also non-discriminatory.  The designation of the beneficiaries of the Drug Arrangements
is based on an overall assessment of the severity of the drug problem in each developing country,
made in accordance with objective, non-discriminatory criteria.  India does not qualify under those
criteria.  Indeed, India does not dispute this.  Nor does India claim that any of the beneficiary
countries fails to meet the relevant criteria.
(c) Article XX of GATT 1994
4.159  The primary goal of the Drug Arrangements is to promote the development of the countries
affected by the production or trafficking of drugs.  But in so doing, the Drug Arrangements also
contribute to the objective of reducing the consumption of drugs within the European Communities.
4.160  It is beyond question that drugs pose a serious threat to human life and health.  The Drug
Arrangements are a necessary component of the European Communities' strategy against drug abuse.
As just explained, the fight against drugs requires a balanced approach,  which includes the promotion
of sustainable alternative economic activities in order to reduce the illicit supply of drugs.  In
accordance with the principle of shared responsibility, the European Communities and its member
States already provide substantial technical and financial assistance to the countries concerned.  The
Drug Arrangements are a necessary complement to such assistance.
4.161  Thus, even if the Panel were to find that the Drug Arrangements are not consistent with the
Enabling Clause, they would be justified under Article XX(b) of the GATT as  being necessary for the
protection of the health and life of the European Communities' population.
E. 
SECOND WRITTEN SUBMISSION OF INDIA
1. The Drug Arrangements are inconsiste nt with Article I:1 and the European
Communities bears the burden of proof under the Enabling Clause
4.162  The tariff preferences granted under the Drug Arrangements to certain products originating in
the preferred Members are advantages which are not granted immediately and unconditionally to like
products originating in all other Members.  Hen ce, the tariff preferences are inconsistent with
Article I:1.WT/DS246/R
Page 35
4.163  Article I:1 of GATT 1994 requires that the exte nsion of an advantage cannot be made subject
to conditions  with respect to the situation or conduct of a Member .  The European Communities
argues that Article I:1 only requires that the extension of an advantage cannot be made subject to
conditions which require a Member to provide some form of compensation .  In the European
Communities' view, the Article I:1 "unconditionally" requirement allows a Member to imposeconditions falling outside of what could be deemed as "compensation".  The European Communities
bases this interpretation on the understanding of the term "conditional" in the context of conditional
MFN clauses.  Even if the European Communities is correct – that in the context of conditional MFN
clauses, the term "condition" alludes to a requir ement to provide some compensation for the benefits
received from another party – the European Communities is not correct when it concludes that "the
'Drug Arrangements' are clearly 'unconditional' within the meaning of that term in the context of MFN
clauses. "  (italics supplied).  The meaning of "conditio n" in the context of a conditional MFN clause is
not determinative of the meaning of "unconditionally" in an unconditional MFN clause.
"Unconditional" simply means the absence of conditions, regardless of the technical meaning of
"condition" in the context of conditional MFN clauses.  If black is the opposite of white and
"conditional" is the opposite of "unconditional", what is not black is not necessarily white, and what is
not "conditional" is not necessarily "unconditional".
4.164  The European Communities' limited interpretatio n of the term "unconditionally" should be
rejected for the following additional reasons:
(a) The European Communities' interpretation is unsupported by the ordinary meaning of
the term "unconditionally".  From the ordinary meaning, there emerges no basis to
restrict the scope of this term to a specified category of "conditions which require aMember to provide some form of compensation".  The European Communities does
not provide any justification for this restriction.
(b) Even on the selective "historical method" of interpretation followed by the European
Communities, the material highlighted by the European Communities is irrelevant.
The relevant comparison is not the historical usage of the term "condition" in thecontext of conditional MFN clauses, but, rather, the usage of "unconditional" in the
context of unconditional MFN clauses
(c) The European Communities' interpretation is  contrary to WTO jurisprudence.  The
European Communities states that there is conflicting jurisprudence on the matter.
Even assuming that there is such conflicting jurisprudence, the European
Communities' interpretation is not supported by any jurisprudence.
4.165  The European Communities bears the burden of es tablishing that the Drug Arrangements are
justified under paragraph 2(a) of the Enabling Clause.  The European Communities seeks to impose
on India the burden of establishing the negative  of the European Communities' defence – that the
Drug Arrangements are justified under paragraph 2(a) of the Enabling Clause – by the mere expedient
of characterizing paragraph 2(a) as conferring an "autonomous right".  India considers that the
Enabling Clause is not an "autonomous right" as the European Communities alleges.  The EuropeanCommunities does not define "autonomous right".  Instead, it merely asserts a conclusion of law, i.e.,
that the Enabling Clause is not a derogation or deviation from the obligation stated in Article I:1 of
GATT 1994.  India maintains that, on the contrary, the Enabling Clause is a derogation or deviation
from the obligation stated in Article I:1 of GA TT 1994.  Paragraph 2(a) of the Enabling Clause
permits or "enables" developed country Members to take certain measures which Article I:1 otherwiseprohibits, subject to certain conditions.  It does not operate as a substituting regime to regulate all
aspects of trade relations between developed and de veloping countries.  Moreover, paragraph 2(a) of
the Enabling Clause does not impose any positive obligation on developed country Members to
establish GSP schemes.WT/DS246/R
Page 36
4.166  The purpose of paragraph 2(a) of the Enabling Clause, in permitting developed country
Members to grant preferential tariff treatment to de veloping countries under the GSP, is not to confer
a privilege to developed country Members; rather, paragraph 2(a) was adopted for the benefit of
developing countries.  The European Communities claims that the absence of the phrase "to the extent
necessary" allows developed country Members to be absolved from all of their obligations underArticle I:1 of GATT 1994, even beyond the extent of what is necessary to provide differential and
more favourable treatment to developing countries.
4.167  India notes that the phrase "to the extent necessary" was used in the 1971 Decision but it was
not used in the Enabling Clause, however the explanation for this omission is simple.  The 1971
Decision was a waiver.  Thus the formulation was "… the provisions of Article I shall be waived … to
the extent necessary…"  In the context of a waiver, the phrase "to the extent necessary" is not
redundant, as it circumscribes the extent to which obligations are waived.  However, the EnablingClause was adopted as a decision, not as a waiver.  Therefore the corresponding formulation is
"notwithstanding the provisions of Article I of the General Agreement, [Members] may accord
differential and more favourable treatment to developing countries without according such treatment
to other Members".  The Enabling Clause thus pe rmits certain acts which Article I:1 of GATT 1994
otherwise prohibits.   In this type of formulatio n, it would have been redundant to state that "Members
may accord differential and more favourable treatment to developing countries without according
such treatment to other Members … to the extent necessary  to accord differential and more favourable
treatment to developing countries."
4.168  Furthermore, it would seem that the European Communities argues that the phrase
"notwithstanding Article I:1 of GATT 1994 totally ex cludes the application of that Article.  The use
of the term "notwithstanding" (or synonymous terms) in a provision does not necessarily mean that
the provision confers a "self-standing autonomous right".  For instance, Article XX uses the
formulation "nothing in this agreement shall be construed to prevent", and yet it is beyond doubt that
Article XX is an exception and an affirmative defence.
4.169  Burden of proof must be assessed in relation to the material elements of the plaintiff's claim
and the material elements of the defendant's defence.  India's claim in these proceedings, as expressed
in its first written submission, is based on Articl e I:1 of GATT 1994 and not on paragraph 2(a) of the
Enabling Clause.  Paragraph 2(a) of the Enabling Clause is therefore not a material element of India's
claim.  To defeat India's claim, the European Communities may assert, and it has chosen to so assert,
that the tariff preferences under the Drug Arrangements are justified under the Enabling Clause.  It is
thus incumbent on the European Communities to prove the affirmative of its defence – that the Drug
Arrangements are in fact covered by that Clause.  The European Communities' mere assertion that theDrug Arrangements are covered by the Enabling Clause does not in itself constitute proof of the
affirmative of the European Communities' defence.  The mere assertion therefore does not shift the
burden of proof to India to establish the negative of the European Communities' defence.
4.170  Paragraph 2(a) of the Enabling Clause is an affirmative defence.  It has legal functions and
characteristics similar to other provisions of the GATT that the Appellate Body has recognized as"affirmative defences".  There are no positive obligations under Articles XI:(2)(c)(i), XX and XXIV
of the GATT in the sense that no Member can be compelled to impose quantitative restrictions, to
adopt measures under Article XX or to establish customs unions or free trade areas, respectively.
Similarly, under paragraph 2(a) of the Enabling Clause, no Member may compel a developed country
Member to grant preferential tariff treatment to the developing countries.  In the same manner thatArticles XI:(2)(c)(i), XX and XXIV are exceptions and at the same time "defences", the Enabling
Clause is likewise an exception to certain aspect s of Article I:1 of GATT 1994 and could be invoked,
in the proper case, as a defence in a claim of violation of that Article.
4.171  Under each of these provisions, even assuming that it is established that the measure at issue
violates the provision to which the exception applies, the Member adopting the measure may stillWT/DS246/R
Page 37
invoke the exceptions as (affirmative) defences.   This falls squarely within the definition of
"affirmative defence".  In a dispute involving a claim which is subject to a potential affirmative
defence, the claim is first examined in relation to the provision to which it is inconsistent, as claimed
by the complainant.  If the claim is found to be me ritorious, then the next step is the examination of
the affirmative defence put forward by the respondent.   This is precisely how the Enabling Clause as
an affirmative defence has been dealt with in prior GATT jurisprudence.43
4.172  The European Communities cites Brazil – Aircraft, to support its assertion that India bears the
burden of proving that the European Communities' Drug Arrangements are inconsistent with
paragraph 2(a) of the Enabling Clause.  The Appellate Body upheld the Panel finding on the issue of
burden of proof as it considered that- in contrast to "affirmative defences" contained in several GATT
provisions – the provision concerned (Article 27.4 of the SCM Agreement) set forth "positive
obligations  for developing country Members, not affirmative defences ." In contrast, paragraph 2(a) of
the Enabling Clause does not impose positive obligations or positive rules establishing obligations in
themselves.  Rather, it is a limited exception to Article I:1 of GATT 1994, which could be invoked as
an affirmative defence.  The European Communities appears to contend that because Article 27 of the
SCM Agreement is listed in a WTO Secretariat document as a Special and Differential Treatment
(S&D) provision along with the Enabling Clause, the Enabling Clause has automatically the samelegal function and characteristics as Article 27.4 and as a consequence, the burden of proof when a
defendant invokes the Enabling Clause shifts to the complainant claiming a violation of the relevant
substantive provision.  This argument of the European Communities is incorrect.  In Brazil-Aircraft ,
Articles 27.2 and 27.4 were indeed considered part of S&D.  But the panel and the Appellate Body
decided that it was for the complainant to bear the burden of proof of Article 27.4 in a substantiveclaim on Article 3.1(a) of the SCM Agreement not because Article 27.4 is an S&D provision,  as the
Enabling Clause may be, but rather because that provision in itself establishes positive obligations that
a defendant would have to comply with.  Finally, India notes that in Brazil-Aircraft , the S&D
provision was invoked by a developing country.  In this dispute, it is invoked by a developed country.
2. The Enabling Clause does not exclude the application of Article I:1 but authorizes
limited derogation
4.173  The Enabling Clause does not exclude the application of Article I:1 of GATT 1994 in all
circumstances.  Any examination of the scope of the exception under the Enabling Clause must be
undertaken with particular care.  Panels should not lightly assume that a derogation from a developing
country's  rights under Article I:1 is authorized under the Enabling Clause.  The Enabling Clause is
after all meant to be for the benefit of developing countries.  As the Enabling Clause is an
"exception", the phrase "notwithstanding the provisions of Article I of the General Agreement" in theEnabling Clause does not necessarily exclude the application of that article in all circumstances.
4.174  In a case involving Article XXIV of GATT 1994, another provision which may be
characterized as an "exception", the Appellate Body had the opportunity to examine the meaning of
the phrase "the provisions of this Agreement shall not prevent  … the formation of a customs union"
in Article XXIV:5 of GATT 1994.  The Appellate Body then proceeded to affirm that the phrase"nothing shall prevent" means that nothing in th e GATT shall make impossible the formation of a
customs union but only to the extent that the formation of the customs union would be prevented if the
introduction  of the measure were not allowed.  But by virtue thereof, the application of Article I:1 is
not totally excluded, but, rather, only to the extent that the granting of tariff  preferences under the
GSP would be prevented if the introduction of a measure were not allowed.
44
4.175  India maintains that respecting the MFN rights of developing countries as between
themselves does not make impossible the granting of preferential tariff treatment to developing
                                                     
43 Panel Report, US – Customs User Fee , at 289-290; Panel Report, US – MFN Footwear,  at 153.
44 Appellate Body Report, Turkey – Textiles, DSR 1999:VI, 2345 at p. 2354.WT/DS246/R
Page 38
countries in the context of the GSP; neither would the granting of preferential tariff treatment to
developing countries under the GSP be prevented if the granting of tariff preferences to some
developing countries but not to all developing countries were not allowed.  In the context of the GSP
therefore, only the MFN rights of developed countries need to be derogated from.
4.176  There is no wording in paragraph 2(a) reflecting the agreement of developing country
Members to forego their rights under Article I:1 of GATT 1994 in respect of benefits accorded to all
other Members, including to other developing countrie s in the context of the GSP.  India contends that
in the context of preferential tariff treatment under paragraph 2(a) , the Enabling Clause does not
exempt violations of MFN rights of developing countries in respect of preferential tariff treatment
accorded to other developing countries .  The European Communities and the United States have
misunderstood this limited contention to be a far broader contention – that any derogation from the
MFN rights of developing countries under Article I: 1 cannot be authorized under the Enabling Clause.
The European Communities, the Andean Community and the United States advance a set of
arguments which seek to establish that this broader contention is erroneous.  For instance, according
to them, if such a broad contention were to be accepted, it would prevent regional arrangements
between developing countries under paragraph 2(c), or prevent special measures in favour of the
least-developed countries under paragraph 2(d) or run counter to the broad terms of paragraph 1 of theEnabling Clause.  However, these arguments are si mply beside the point, as India has not advanced
any such broad contention. In India's view, a conjunctive reading of paragraphs 1 and 2(a) of the
Enabling Clause would entail that the term "other contracting parties" in the context of measures taken
under paragraph 2(a) , refers to "other developed country Members". India notes that the content of
the term "other Members" in paragraph 1 of the Enabling Clause must be understood in conjunctionwith the specific sub-clause of paragraph 2 invo lved. India does not contend that the term "other
Members" in paragraph 1 of the Enabling Clause invariably refers to "other developed country
Members".
45  It has been emphasized by Costa Rica and the Andean Community that the 1971 Waiver
uses the term "other contracting parties" as opposed to the term "other developed countries"
deliberately.  The Minutes of the Council meeting which adopted the 1971 Waiver uses the term"other contracting parties" as opposed to the term "other developed countries" deliberately.  The
Minutes of the Council meeting that adopted the 1971 Waiver
46 indicate that the use of this
terminology does not in any way imply that differ entiation between developing countries recognized
as beneficiaries is permitted; instead this terminology was endorsed for a variety of reasons.  For
instance, India points out that "… since there was no precise and acceptable list of developed
countries it did not see any merit in the proposal" and that "… several aspects as the schemes as
agreed to within UNCTAD were inter-connected and no effort should be made to re-open any aspect,
for example the question of beneficiaries".
4.177  India's limited contention derives from the star ting point that there must be unambiguous
authority within the Enabling Clause to exempt a violation of the MFN rights of a developing country.
As the opening phrase of paragraph 2 of the Enabling Clause makes clear, any measure taken under
the Enabling Clause must fall under one of the sub-clauses of paragraph 2.  Paragraph 2(d) andparagraph 2(c) do provide authority to adopt measures otherwise in violation of the MFN rights of a
developing country, but this dispute does not deal with those types of measures.  What is relevant in
this dispute is that paragraph 2(a), the only sub-clause which authorizes preferential tariff treatment
granted by a developed country to developing countries in the context of the GSP.  Thus, the
European Communities must find unambiguous authority for its violation of the Article I:1 rights ofdeveloping countries in paragraph 2(a) of the Enabling Clause.
4.178  There is no language in paragraph 2(a) which expressly authorizes developed countries to
derogate from the unconditional MFN rights of developing countries.  The European Communities
relies on the term "non-discriminatory" in footnote 3 for justification to derogate from the
                                                     
45 Second written submission of India, para. 70 and footnote 42.
46 C/M/69.WT/DS246/R
Page 39
unconditional rights MFN rights of developing countries in respect of benefits accorded to a limited
group of developing countries.  However, such reliance is misplaced.  As elaborated below, the term
"non-discriminatory" does not authorize differentiation in the treatment of developing countries; on
the contrary, it is used precisely to ensure that differentiation between developing countries is
prohibited.
3. "non-discriminatory"
(a) Introduction
4.179  The European Communities has failed to demonstrate that under the Drug Arrangements it
accords tariff treatment that is "non-discriminator y" within the meaning of paragraph 2(a) of the
Enabling Clause.  India and the European Communities differ in their respective interpretations of the
term "non-discriminatory".  India has defined "non-discriminatory" treatment in the context of
paragraph 2(a) of the Enabling Clause as referring to "treatment that does not make a distinctionbetween different categories of developing countries." ("neutral meaning of 'non-discriminatory'")
The European Communities contends that "the term 'non-discriminatory' does not prevent Members
from treating differently developing countries which, according to objective criteria, have different
development needs" ("negative meaning of 'non-discriminatory'").
4.180  The appropriate meaning of "non-discriminatory" as used in the Enabling Clause is its neutral
meaning.
(b) GATT 1994 as context
4.181  First, within the context of the GATT, the term "discrimination" is consistently used to
describe the denial of equal competitive opportunities to like products irrespective of the origin.  The
Enabling Clause is an integral part of the GATT 1994.  The definition of the term "non-discrimination" in the GATT 1994 consistently refers to affording equal competitive opportunities to
like products originating in different countries.  It follows that, in the context of the Enabling Clause,
non-discrimination means equal treatment of like products, except if a specific provision of the
Enabling Clause provides otherwise.
(c) Paragraph 2(d) and 2(b) as context
4.182  Second, the express reference to special and differential treatment for least-developed among
the developing countries in paragraph 2(d) of the Enabling Clause supports India's interpretation of
the term "non-discriminatory.  The need to establish an explicit exception for the least-developed
countries confirms India's interpretation of the term non-discriminatory.  If developed countries could
differentiate between developing countries based on the European Communities' interpretation of
"non-discriminatory", then clearly developed countries could differentiate between developing
countries in favour of least-developed countries.  Therefore, the permission to favour least-developedcountries among developing countries in paragraph 2(d) would become redundant and meaningless.
This cannot be reconciled with the principle of effectiveness in treaty interpretation upheld in many
cases by the Appellate Body.
4.183  The European Communities contends that paragraph 2(d) is not redundant because it covers
"special treatment" for least-developed countries, including measures not covered by paragraph 2(a)(non-tariff measures).  A similar argument is made by the countries of the Andean Community.  The
European Communities' argument overlooks the language of paragraph 2(d) which refers to "any
general or specific measures" without distinguishing between tariff and non-tariff measures.
Paragraph 2(d) does not exclude tariff measures from its scope, as the European Communities and the
Andean Community imply.  On the contrary, had the intention of the drafters been to limit the scopeWT/DS246/R
Page 40
of paragraph 2(d) to non-tariff measures, it would not have been difficult to import the language of
paragraph 2(d) into 2(b), the only provision which explicitly covers only that category of measures.
4.184  The European Communities arguments also overlook the fact that unlike paragraph 2(a), there
is no explicit non-discrimination requirement in respect of non-tariff measures in paragraph 2(b).
Under the European Communities' reading of the Enabling Clause, nothing would prevent adeveloped country from discriminating in favour  of least-developed countries based solely on
paragraph 2(b).  If this were the case, the question that arises is why would it be necessary to
explicitly provide for permission to differentiate in favour of least-developed countries under
paragraph 2(d)?  Therefore, the European Communities' reading of paragraph 2(d) renders this
provision ineffective.
(d) "the developing countries" in paragraph 2(a) as context
4.185  Third, the use of the definite article "the" with reference to "developing countries" indicates
that the GSP must be beneficial to all developing countries, and excludes the selective grant of tariff
preferences this also supports India's interpretation.  The term "the" developing countries appears in
four instances in authentic versions of the Enabling Clause.  This indicates that the paragraph 2(a) of
the Enabling Clause was meant to ensure that benefits under the GSP are extended to all developing
countries, as opposed to some developing countries.  Paragraph 2(a) of the Enabling Clause does notenvisage selectivity.  Instead, it requires that preferential tariff treatment is accorded to all developing
countries.  Further, as indicated above, non-disc riminatory treatment in the context of the GATT
involves conferring equality of competitive opportunities.
4.186  It would be meaningless to impose a requirement that all developing countries must be
included in preferential tariff arrangements without a corresponding obligation of"non-discriminatory" tariff treatment in order to ensure equal competitive opportunities for products
originating in all developing countries.  Consequently, following the European Communities'
interpretation that "non-discriminatory" does not entail equal competitive opportunities renders the
requirement that "the" (all) developing countries must benefit from preferential tariff treatment
ineffective.
(e) UNCTAD instruments as context and drafting history
4.187  Fourth, the texts which established the generalized system of preferences ("GSP") under the
auspices of the UNCTAD support India's interpretation of the term "non-discriminatory".  The term
"non-discriminatory" in the Enabling Clause reflects the meaning of that term as understood in the
texts accepted at the UNCTAD.  The meaning of the term "non-discriminatory" as used in footnote 3
to the Enabling Clause is identical to its meanin g in the context of the Agreed Conclusions.  Within
the Agreed Conclusions, there is no reference to the notion that the developed countries should beable to distinguish between the countries that they have recognized to be developing countries on the
basis that they have different development needs.  The term "non-discriminatory" as understood in the
context of the UNCTAD arrangements does not envisage differentiation between developing
countries on the basis that they have differing development needs; instead, any differentiation
between developing countries was considered "discriminatory".
4.188  This meaning of "non-discriminatory" is also confirmed by the drafting history of
Resolution 21(II) of the Second UNCTAD and the Agreed Conclusions.  Indeed, the Agreed
Conclusions do not even authorize developed countries to provide tariff reductions limited to
least-developed countries to the exclusion of other developing countries.  The Agreed Conclusions
permit developed countries to vary the tariff reductions granted on different products.  But in respectof the same product, developed countries could not vary the tariff reduction granted, even to favour
the least-developed countries.WT/DS246/R
Page 41
4.189  Further, the Agreed Conclusions contemplated the participation of all developing countries as
beneficiaries of the GSP and selective schemes were not envisaged.  The Agreed Conclusions state
that "there is agreement with the objective that in principle all developing countries should participate
as beneficiaries from the outset." By permitting differentiation between developing countries, the
European Communities' interpretation of "non-discriminatory", would render the requirement that "alldeveloping countries should participate as beneficiaries from the outset" meaningless.
(f) Paragraph 3(c) as context
4.190  Moreover, the requirement to respond positively to the needs of developing countries set out
in paragraph 3(c) of the Enabling Clause does not lend contextual support for the interpretation of the
term "non-discriminatory" advanced by the European Communities.  The European Communities
argues that the term "non-discriminatory" in footnote 3 of the Enabling Clause cannot mean treating
all developing countries in the same way, because developed countries would be effectively precludedfrom responding positively to the individual needs of developing countries "thus rendering a nullity
the requirement set forth in paragraph 3(c)".  The European Communities' argument is based on a
wrong premise, namely that the term "development, financial and trade needs of [the] developing
countries" refers to the individual needs of those countries.  In fact, however, the terms of paragraph
3(c) do not refer to "individual" needs.  The text of paragraph 3(c) does not express this idea.  Wherethe drafters of the Enabling Clause had the needs of individual countries or groups of countries in
mind, they referred to those needs explicitly.
4.191  The European Communities is correct in that the collective needs of developing countries can
vary from time to time and therefore paragraph 3(c) mandates that preferences should be modified if
necessary.  However, it does not follow that they must be modified by differentiating betweendeveloping countries.  Instead, paragraph 3(c) re fers to modification of the product scope of GSP
schemes and the depth of tariff cuts provided under GSP schemes.  India's interpretation of "non-
discriminatory" does not make paragraph 3(c) a nullity precisely because it operates to ensure that the
product scope and depth of tariff cuts in GSP schemes respond positively to the collective needs of
developing countries.
4.192  The European Communities' assertion that a scheme designed to address exclusively drug
problems responds to the development needs of developing countries as defined in paragraph 3(c) can
also not be reconciled with the fact that, throughout the Enabling Clause, the needs of developing
countries are defined as the "development, financial and trade needs".  The conjunctive term "and"
makes clear that, when evaluating the consistency of a GSP scheme with paragraph 3(c) or the degree
of non-reciprocity to be accorded to a developing country under paragraphs 5 and 6, the development,
financial and the trade needs have to be assessed collectively.
4.193  Accepting the European Communities' construction of paragraph 3(c) as referring to the
"individual" needs of developing countries could have perverse consequences.  For instance, a WTO
Member that decides to reduce its tariffs on products from all developing countries to zero would find
its GSP scheme inconsistent with paragraph 3(c) of the Enabling Clause.  Paragraph 3(c) would
mandate that the obligation of that Member to "modify if necessary" its GSP scheme to respond toindividual  countries' needs constitutes in this  circumstance an obligation to reintroduce tariffs on
products from developing countries that have lesser needs.  Thus, the European Communities'
interpretation of paragraph 3(c) implies that it would be illegal for a developed country to adopt the
most constructive response to the developing countries' needs that can be conceived – the elimination
of all duties on products from all developing countries.
4.194  In according tariff preferences to the developing countries, the European Communities'
general GSP arrangement does not make distinctions between developing countries as to their
individual development, financial and trade needs.  Therefore, if the European Communities' reading
of paragraph 3(c) were deemed to be appropriate, its general GSP scheme which applies equally to allWT/DS246/R
Page 42
developing country beneficiaries would not be resp onsive to the individual needs of each and every
beneficiary developing country.  This would lead to the conclusion that the main scheme of the
European Communities providing tariff preferences to the developing countries would be inconsistent
with paragraph 3(c) of the Enabling Clause.
(g) "Generalized" as context
4.195  The term "generalized" in footnote 3 also does not lend contextual support for the
interpretation of the term "non-discriminatory" advanced by the European Communities.  The
European Communities argues, in its replies to quest ions from the Panel, that the term "generalized"
would be redundant if India's interpretation of "non-discriminatory" were accepted.  The European
Communities' argument fails to recognize that the te rm "generalized" refers to the range of countries
that would accord and receive preferences while the term "non-discriminatory" refers to the degree of
differentiation between the countries selected as beneficiaries.  Thus a GSP scheme could be"generalized" in the sense that all developing countries are beneficiaries, while at the same time
violate the requirement that GSP schemes be "non-discriminatory" because the beneficiary countries
are treated differently.  It is apparent that India's interpretation does not render the term "generalized"
redundant.
4.196  Furthermore, the European Communities interprets "generalized" as a requirement that
"preferences should be "generalized" to all the de veloping countries with similar development needs".
The requirement to treat countries with similar development needs alike and countries with different
development needs differently is the core of the European Communities' negative definition of "non-
discriminatory".  Thus it is the European Communities' interpretation of "non-discriminatory" which
would make the term "generalized" (as that term is understood by the European Communities)redundant.
(h) Implications for the WTO multilateral system
4.197  India also contends that the European Communities' interpretation of the term "non-
discriminatory" should be rejected on two further systemic grounds.  First , the GATT could not fulfil
the function of providing the legal framework of market access negotiations between developed anddeveloping countries if the European Communities' interpretation of the term "non-discriminatory"
were accepted.  One of the main functions of the GATT is to provide a legal framework for the
exchange of market access concessions which may ensure the value of substantial reduction of tariffs
and the elimination of discriminatory treatment that undermines those reductions.  Article I of the
GATT is the cornerstone of this framework because it ensures that Members can exchange tariff
concessions without having to fear that preferential treatment subsequently accorded to third countries
effectively eliminates the negotiated competitive opportunities.  Thus, in market access negotiations,there are two important elements:  (i) the level of bound tariffs;  and (ii) the assurance that tariffs
applied within the bound levels are applied on an MFN basis.
4.198  The developing countries compete mainly with other developing countries in the markets of
the GSP donor countries.  If the European Communities' interpretation of the Enabling Clause were
endorsed, the developing countries would therefore never have any assurance that the tariffs they havenegotiated with developed countries will be applied on an MFN basis as between developing
countries.  This would have radical implications on the ability of developing countries to participate in
multilateral tariff negotiations.
4.199  The second implication of European Communities' interpretation of the term "non-
discriminatory" is that the panels would be dr awn into distribution conflicts between developing
countries without any normative guidance from the WTO Membership if the European Communities'
interpretation of the term "non-discriminatory" were accepted.  The European Communities' notion of
"non-discriminatory" as referring to prejudicial  or unjust  discrimination is too vague to provide aWT/DS246/R
Page 43
basis for policing differentiation in the context of GSP schemes.  There is no further multilaterally-
accepted standard within the Enabling Clause for determining what makes differentiation "unjust".
Thus, adopting the European Communities' definition will result in leaving the developed countries
free to differentiate as they see fit or involve panels in adjudicating distribution conflicts without any
guidance from the WTO membership, such as whether difficulties faced on account of serious publichealth problems are more pressing than difficulties faced on account of drug production and
trafficking.  This uncertainty will have radical implications on the institutional balance between
political and judicial bodies of the WTO, and would engage the adjudicating bodies in a law-making
process which is the exclusive prerogative of the membership.
4. The application of the Drug Arrangements is not "non-discriminatory"
4.200  As a subsidiary argument, India maintains that the preferences accorded under the Drug
Arrangements would be "discriminatory" even if the European Communities' interpretation of theterm "non-discriminatory" were accepted.  The European Communities accords preferential tariff
treatment based on drug-related problems and fails to accord preferential tariff treatment based on
more severe problems of developing countries.  Even assuming that "non-discrimination" has the
negative meaning attributed to it by the European Communities, the Drug Arrangements would not be
"non-discriminatory".
4.201  The Drug Arrangements are not concerned with the relative  development needs as between
developing countries.  They are exclusively concer ned with a single category of development need –
the need arising from the production and trafficking of drugs.  There is no basis for the European
Communities to conclude that the development needs faced by beneficiary countries under the Drug
Arrangements are "special" relative to the development needs of other developing countries.  TheEuropean Communities does not even make such a contention in its submission; it merely contends
that drug problems are linked with development.  At best, this can establish that countries particularly
affected by drug production or trafficking have one type of development need, but crucially, it does
not establish that they have a " special"  development need which entitles them to a greater
"commensurate" share of international trade than that granted to other developing countries.
4.202  Moreover, the Drug Arrangements do not contemplate any objective criteria for determining
beneficiary status.  The European Communities asserts that in order to determine the beneficiaries of
the Drug Arrangements, it applies objective criteria that potential developing country beneficiaries
must meet.  As set out in the Regulation, the Drug Arrangements contain no criteria or procedures for
inclusion as a beneficiary.  The European Communities' claim that the measures at issue in these
proceedings distinguish between developing countries according to objective criteria reflecting their
individual development needs is therefore factually baseless.  The European Communities has alsofailed to demonstrate that selection of the beneficiaries was based on an objective assessment of the
drug-related needs of all developing countries.
4.203  The European Communities has provided no evidence that the selection of the current
beneficiaries was based on objective criteria.  Moreover, the European Communities has submitted no
evidence whatsoever demonstrating that the countries excluded from the scheme do not have similardrug problems.  In its submission, it describes the drug problems of the beneficiaries in general terms,
partly by using statistics that became available after the beneficiaries had been selected.  On the basis
of the European Communities' explanations, it is impossible to determine why for instance, Pakistan
was included while India and Paraguay were excluded.  Neither has the European Communities
submitted any evidence that it had in fact conducted an objective assessment of all countries' drugproblems before establishing the list of beneficiaries, despite requests from the Panel and India.  All it
has submitted to the Panel is a lengthy ex post  justification prepared on the basis of UN documents
and quantitative data that do not reveal a single objective criterion or any benchmark for inclusion or
exclusion equally applied to all potential beneficiaries.WT/DS246/R
Page 44
5. The Drug Arrangements are not justified under Article XX
4.204  The Drug Arrangements are not justified by Article XX(b) of GATT 1994 as the European
Communities has not demonstrated that the Drug Arrangements are necessary  to protect human life or
health  within the meaning of Article XX(b).
(a) The Drug  Arrangements do not constitute a measure under Article XX(b)
4.205  First, the Drug Arrangements "are not designed to achieve" the protection of human life and
health in the European Communities.  The Euro pean Communities only states that the measure at
issue is designed to protect the life and health in the European Communities, but it fails to substantiate
its assertion.  Mere assertion does not amount to proof.  In the case at hand, it is difficult to see how:
(i) the Drug Arrangements could be regarded as having been designed to protect human life or health
from the risks posed by the consumption of illicit drugs in the European Communities;  and (ii) how
the granting of tariff preferences equally to all developing countries would exacerbate those risks.  Anexamination of the design, structure and architecture of the Drug Arrangements shows that there is no
express relationship between the objectives stated by the European Communities and the Drug
Arrangements.  There is no stated objective in Council Regulation 2501/2001 relating to the
protection of the life or health of the European Communities' population nor in the explanatory
memorandum leading to this regulation.
(b) Drug Arrangements are not "necessary" within the meaning of Article XX(b)
4.206  Second, the Drug Arrangements are not "necessary" to protect human life or health of the
European Communities' population.  The European Communities argues that it is necessary for the
health of the European Communities' population to impose the Drug Arrangements.  In other words, if
the tariff preferences were removed, the health of European Communities' citizens would worsenbecause a greater amount of illicit drugs would be produced and trafficked into the European
Communities and then consumed by European Communities' citizens.  The relationship between tariff
preferences and the health of the European Communities' population is remote, if at all there is such a
relationship.  The necessary link that the European Communities draws between preferential tariff
treatment and the health of the European Communities' population is based on several assumptions,the principal assumption being that drug produc ers would ultimately switch to the production of
products covered by the preferential tariffs, and that drug traffickers would ultimately switch to
trading products covered by preferential tariffs.  The measure considered by the European
Communities to be "necessary" ends up becoming a measure rather "contingent" upon several
external factors that do not depend on the European Communities.  These external factors, include,
profitability of alternative economic activities, determination and effective action on the part of the
beneficiary's government to implement crops substitution policies, improvement of law enforcementactions in the territory of the beneficiary, and render the policy sought (i.e.  the protection of life and
health of the European Communities' population) uncertain.  Conversely, in making the link between
preferential tariff treatment and the health of the European Communities' population, it assumes, just
as implausibly, that if the tariff preferences under the Drug Arrangements were to be accorded to all
developing countries, producers and traders of legitimate products covered by the Drug Arrangementswould switch to production and trafficking of illicit drugs.  This assumption disregards the reality that
drug production and trafficking are organized crimes, controlled by criminal syndicates motivated by
profit alone, and that the preferential market access provided by the European Communities is not the
reason why law-abiding citizens keep out of the drug trade.
4.207  In this regard, India notes that the Drug Arrangements are not limited to crops which could
act as substitutes for the cultivation of narcotics; neither has the European Communities put forward
evidence establishing that the Drug Arrangements cover agricultural crops which could substitute for
narcotic crops.  Furthermore, the Drug Arrangements are linked to the drug situation in a given
country, not to the drug-related policies followed by a particular country.  This may have theWT/DS246/R
Page 45
paradoxical effect of reducing market access opportunities to the European Communities if the drug
problem in a given beneficiary country improves.
4.208  The European Communities also contends that  the Drug Arrangements are necessary to
protect the health of the its population by increasing the overall level of development which, in turn
increases the capacity  of drug affected countries to enforce an effective system of drug control.  This
link between preferential tariff treatment and improved capacity to enforce is again remote.  There is
no proximate and clear relationship between preferential tariff treatment and the capacity to enforce.
Along the extended chain of causality posited by the European Communities, there are many
alternative less trade restrictive measures that could be taken by the European Communities to
achieve its objective.  For instance, direct technical and financial assistance for the drug control
efforts of affected countries or development aid and initiatives that do not involve the restriction of
trade from other WTO Members.
4.209  The European Communities has failed to establish that the Drug Arrangements are the "least
trade restrictive measure" available to pursue its health objective.  Preferential tariff treatment
necessarily reduces the competitive opportunities for products from excluded countries.  As a matter
of economic theory this is undeniable.  The Drug Arrangements restrict both the present and future
trade of excluded Members.  If this were not the case, then the European Communities could haveincluded India and other developing countries in the Drug Arrangements without any converse impact
on the trade of the beneficiary countries.  India has also provided evidence of trade losses suffered by
Indian enterprises on account of the Drug Arrangements.  To illustrate, the inclusion of Pakistan in the
Drug Arrangements has already resulted in adverse effects on Indian imports into the European
Community  in respect of various categories of textiles and clothing products including category 4(shirts, T-shirts etc.), category 8 (men's or boy's shirts) and category 20 (bed linen). Imports into the
European Communities of products from India under these categories declined during 2002 as
compared to 2001 while those from Pakistan showed  a significant increase during the corresponding
period. Letters from importers in the European Communities cancelling orders from India on account
of these tariff preferences are a concrete manifestation of the trade restrictive nature of the DrugArrangements.
47
4.210  India also argues that the GATT could not fulfil its function of providing the legal framework
for multilateral trade negotiations if Article XX(b) could justify preferential trading arrangements.
According to the European Communities' interpretation of Article XX(b) of GATT 1994, WTO
Members may accord preferential tariff treatment  to selected WTO Members if this makes a
"necessary contribution" to the resolution of a health problem.  The European Communities argues
that the margins of preference enjoyed by the beneficiary countries under the Drug Arrangements are"necessary" within the meaning of Article XX(b) because they make such a contribution.  The logical
implication of the European Communities' argume nt therefore is that the European Communities
would not be under an obligation to implement the market access concessions negotiated in the Doha
Work Programme if the beneficiary countries' drug problems were to continue beyond the conclusion
of that Round.
(c) Drug Arrangements do not meet the requirements of the chapeau of Article XX
4.211  Moreover, the European Communities has not demonstrated that the Drug Arrangements are
not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination
within the meaning of the chapeau of Article XX(b).  The invocation of Article XX(b) by the
European Communities is essentially to justify the violation of Article I:1 of GATT 1994 and not ofthe Enabling Clause.  Thus the distinction between developing countries which are especially affected
by the production or trafficking of drugs and other Members, including developing countries; which
are less affected by that problem does arise from the "application" of the measure in dispute.
                                                     
47 Reply of India to question No. 13 from the Panel to India.WT/DS246/R
Page 46
Article I:1 applies equally to all Members.  It is incumbent on the European Communities to show
that the preferential tariff preferences granted under the Drug Arrangements only to 12 developing
countries do not constitute a means of arbitrary or unjustifiable discrimination or a disguised
restriction on international trade within the meanin g of the chapeau of Article XX(b).  So far, the
European Communities has not demonstrated it.
F. SECOND WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES
1. Relationship between GATT Article I:1 and the Enabling Clause
(a) Special and differential treatment
4.212  India does not contest that the Enabling Clause is one of the main forms of "special and
differential treatment" for developing countries, which in turn is the main instrument to achieve one of
the fundamental objectives of the WTO Agreement.   Yet, India has nowhere addressed the European
Communities' argument that, in view of that, "special and differential treatment" provisions cannot beconsidered as "affirmative defences", as illust rated by the ruling of the Appellate Body in Brazil –
Aircraft.
(b) Drafting history of the 1971 Decision
4.213  India's account of the drafting history of the 1971 Decision does not support its contention
that the Enabling Clause is merely the "renewal" of the 1971 Decision.  The note of the GATTSecretariat cited by India presented the adoption of a waiver under Article XXV:5 and of a declaration
"in order to promote the objectives set out in Article XXXVI." as distinct options with different
consequences.  A passage of that note explained that "The adoption of a declaration outside the
session of the CONTRACTING PARTIES would be a positive and constructive step for the benefit of
developing countries, whereas a full waiver would have a rather negative effect".
4.214  Despite this advice, the waiver option was preferred over the declaration option.  In 1979,
however, the developed countries accepted a formula similar to the declaration option rejected in 1971
as part of the new balance of rights and obligations agreed in the Tokyo Round.
(c) "Positive rights"/"exceptions"
4.215  India argues that the Enabling Clause is not a "positive right", but instead an "exception", by
referring to a definition of "positive right" included in the Black's Law Dictionary.  However, this
definition does not oppose the term "positive right" to the term "exception".  Rather, the Black's Law
Dictionary draws a distinction between "positive rights" and "negative rights", which it defines as "A
right entitling a person to have another refrain from doing an act that might harm the person entitled".
4.216  A "negative right" is still a right and not an "exception".  Thus, for example, according to
Black's Law Dictionary, property rights would have to be classified as "negative" rather than
"positive".  Yet, it would be absurd to characterize those rights as "exceptions".
4.217  The Enabling Clause recognizes a "negative right" to grant preferences to developing
countries and, at the same time, confers a "positive right" to the developing countries to compel the
donor countries to grant such preferences in accordance with certain requirements, including the
requirement that the preferences must be "non-discriminatory".
4.218  It is true that the developing countries do not have a "positive right" to compel the developed
countries to apply a GSP.  But from this it does no t follow that the Enabling Clause is an "exception".
By the same token, Article I:1 of GATT 1994 does  not confer a positive right to compel other
Members to lower their tariffs.  The only obligation under Article I:1 is that whatever level of duties isWT/DS246/R
Page 47
chosen by the Member concerned, it  should be applied to all other Members on an MFN basis.
Similarly, while developed countries are free to decide whether or not to apply a GSP, if they chose to
do so they must apply it on a "non-discriminatory" basis.
(d) "Autonomous right"/"affirmative defence"
4.219  India contends that whether or not a treaty provision is an "affirmative defence" depends on
whether it is asserted in each particular case by the complaining party or by the defendant and that a
provision conferring an "autonomous right" can be also an "affirmative defence" if it is invoked by the
defending party.  This position is manifestly wrong.  A WTO provision is or is not  an "affirmative
defence".  It cannot be both at the same time, depending on which party invokes it.  Certain provisions
are in the nature of "affirmative defences" and can be raised only by the defending party in response
to a claim of violation of another provision.  For example, a complaining party may not bring a claim
based on Article XX of GATT 1994.  That provision is always an "affirmative defence" with respectto the alleged violation of another provision.
4.220  If India's thesis were correct, the Appellate Body should have decided in Brazil – Aircraft  that
Article 27.4 of the SCM Agreement was an "affirmative defence", since it had  been invoked by
Brazil and not by Canada.  Likewise, in EC – Hormones , the Appellate Body should have decided that
Article 3.3 of the Agreement on Sanitary and Phytosanitary Measures ("SPS Agreement") was an"affirmative defence", since it was the European Communities that relied on that provision.
2. The Enabling Clause
(a) Paragraph 1
(i) "Other Members"
4.221  The European Communities has thoroughly refu ted India's reading of the term "other
Members" as meaning "developed Member".  India's response is that the term "other Members" has
different meanings depending on whether paragraph 1 is read together with paragraphs 2(a), 2(b) or
2(c).  The European Communities would agree that the same words may have different meaning in the
context of different treaty provisions.  However, India's position that one and the same provision
(Paragraph 1) has simultaneously three different and conflicting meanings is contrary to basicprinciples of legal interpretation and indeed of elementary logic.
4.222  India also argues that, since the Enabling Clause was adopted "for the benefit of developing
countries", it cannot be interpreted as restricting the MFN rights of some developing countries
vis-à-vis other developing countries.  Yet it is beyond dispute that both paragraphs 2(c) and 2(d) do
precisely that.  They limit the MFN rights of some  developing countries in order to provide additional
benefits to other developing countries.  India' s contention that paragraphs 2(c) and 2(d) are
"exceptions" has no textual basis.  Paragraph 1 "applies" equally to all the subparagraphs included inparagraph 2.  There is no reason to assume that, when read together with paragraph 2(a), paragraph 1
does not allow differentiation between developing countries.  Furthermore, as explained by the
European Communities, such differentiation is consistent with the object and purpose of the Enabling
Clause.
4.223  In response to a question from the Panel, India has been forced to admit that its reading of the
term "other Members" in paragraph 1 would render redundant the requirement in footnote 3 that the
preferences must be "non-discriminatory".  India argues that this requirement is mentioned as part of a
"compound phrase".  However, India's interpretation of the term "other Members" would also render
redundant the term "generalized".  Furthermore, India's position that paragraph 1 does not exempt the
donor countries from the obligation under Article I:1 of GATT 1994 to grant the preferences"unconditionally", would render superfluous also the requirement that the preferences must be "non-WT/DS246/R
Page 48
reciprocal".  Thus, ultimately, India's interpretation of paragraph 1 would render completely
redundant the whole of footnote 3.
(ii) "Unconditionally"
4.224  In its first written submission, India seemed to argue that paragraph 1 does not "exempt"
developed countries from the "unconditionally" requirement in Article I:1 of GATT 1994, with theconsequence that any preferences granted under a GSP remain subject to that requirement.  The
European Communities, and some third parties, have refuted that thesis.  India has submitted no
further arguments.
4.225  In its first written submission, the European Co mmunities also argued that, in any event, the
Drug Arrangements were not "conditional", because the beneficiaries are not required to provide any
compensation to the European Communities.  In response to a Panel's question on the meaning of
"unconditionally", India refers once again to the panel report in Canada – Autos , without addressing
any of the arguments submitted by the European Communities, including with respect to that report.
(b) "Non-discriminatory" in paragraph 2(a)
(i) The ordinary meaning
4.226  India does not contest the analysis of the ordina ry meaning of the term "discrimination" made
by the European Communities in its first written submission.  Nevertheless, India argues that suchmeaning is not relevant for the interpretation of the term "non-discriminatory" in paragraph 2(a) in
view of the specific context of the Enabling Clause, the "basic purpose of the WTO legal system",
certain UNCTAD texts, and a passage of the Appellate Body report in EC –- Bananas III .
(ii) The context
4.227  In response to the questions from the Panel, India has identified several contextual elements
as relevant for the interpretation of the term "non-discriminatory".  However, first, India's arguments
with respect to paragraph 1 have already been addressed in the preceding section of this submission.
Second, from the fact that paragraph 2(a) refers to "products" rather than to "services", or "persons" as
the object of preferential treatment, it does not follow logically that the same treatment must be
granted to all "like products" originating in all deve loping countries.  In any event, India's assumption
that other GATT provisions where the term "like product" is used impose an obligation not to
"discriminate" between like products, rather than between countries, is incorrect.  Third, the European
Communities has addressed India's reading of the phrase "beneficial to the developing countries" in
its first written submission.  Here, the European Communities will limit itself to observe that India's
argument has the a contrario  implication that the absence of the article the before "developing
countries" in paragraph 1 and paragraph 2(a) means that, as argued by the European Communities,
those provisions do not require granting preferences to all developing countries.  Thus, this argument
undermines rather than supports India's position.  The same is true of India's argument based on the
presence of the articles los and des in the Spanish and French versions, respectively, of the title of the
Enabling Clause.  Fourth, the European Communities has responded to India's argument based on
Article 2(d) in its first written submission.  The European Communities' rebuttal remains unanswered.
Finally, the Enabling Clause excludes expressly the application of the requirements of Article I:1 ofGATT 1994 ("notwithstanding Article I:1").  Accordingly, it would be entirely inappropriate to
introduce those requirements into the Enabling Clause by way of a purportedly "contextual"
interpretation.
4.228  India also refers to certain passages included in some UNCTAD texts.  However, as discussed
below, those texts are neither part of the Enabling Clause nor context for the interpretation of theEnabling Clause.  They may become relevant only as supplementary means of interpretation.WT/DS246/R
Page 49
(iii) The object and purpose
4.229  India argues that the term "non-discriminatory" should be interpreted in the light of the "basic
purpose" of the WTO legal system, which according to India is "to protect conditions of competition".
The European Communities disagrees.  The "protection of conditions of competition" is indeed one of
the basic objectives of the WTO Agreement, but it is not the only one.  The Enabling Clause, like allthe other provisions granting "special and differential treatment" does not seek to provide equal
competitive opportunities for like products.  To the contrary, "special and differential treatment"
provisions seek to create unequal conditions of competition in order to respond to the special needs of
developing countries.
4.230  "Special and differential treatment" is the main instrument to achieve one of the fundamental
objectives of the WTO Agreement, which is expressed in:
(a) the second recital of the Preamble to the WTO Agreement;
(b) Article XXXVI of the GATT, including in particular paragraph 3;(c) the first recital of the 1971 Waiver, to which footnote 3 of the Enabling Clause refers.
4.231  When the term "non-discriminatory" is interpreted in the light of the above object and purpose
of the WTO Agreement, differentiating between developing countries according to their development
needs is no more "discriminatory" than differen tiating between developed and developing countries.
4.232  India has nowhere addressed the European Communities' arguments regarding the object and
purpose of the Enabling Clause.  Instead, it persists in the error of interpreting the term "non-discriminatory" as if the "protection of competitive opportunities" were the sole objective of the WTO
Agreement.
(iv) Drafting history
4.233  India appears to imply that, through the reference made in footnote 3 of the Enabling Clause
to the 1971 Decision, the UNCTAD texts which it cites have become part of the Enabling Clause.The European Communities takes issue with that inte rpretation.  By its own terms, the reference made
in footnote 3 covers only the "description" of the Generalized System of Preferences which is
contained in the 1971 Decision itself (more precisely, in the third and fourth recitals).  It does not
extend to the UNCTAD arrangements alluded to in those recitals.
4.234  The two UNCTAD resolutions cited by India (General Principle Eight of
Recommendation A:I:1 adopted by UNCTAD at its first session and Conference Resolution 21(II)
adopted by UNCTAD at its second session) are not legally binding instruments.  They are drafted inpurely hortatory language and, in accordance with their own terms, make only "recommendations".  It
would be illogical and unacceptable to read footnote 3 as conferring upon them legally binding effects
within the WTO which they do not have within UNCTAD.
4.235  The Agreed Conclusions do not even reach the status of a formal UNCTAD resolution or
decision.  Contrary to India's assertion, they were not "adopted" by the Trade and Development Boardof UNCTAD.  Rather, that body "took note" of the conclusions reached within the Special Committee
on Preferences, an ad hoc body established by UNCTAD in order to allow consultations among all the
countries concerned.  Like the UNCTAD resolutions, the Agreed Conclusions use hortatory language
and do not purport to be legally binding.  They take note of the statements made by the prospective
donor countries and record the agreement (and sometimes the lack of agreement) of all theparticipants in the consultations with respect to certain objectives.WT/DS246/R
Page 50
4.236  For the above reasons, the European Communities submits that General Principle Eight,
Conference Resolution 21(II) and the Agreed Conclusions are not part of the Enabling Clause.
Instead, they may be considered as part of the "preparatory work" of the 1971 Decision and as such a
"supplementary means of interpretation", to which th e Panel may resort in the circumstances specified
in Article 32 of the Vienna Convention.
4.237  In any event, there is nothing in General Principle Eight, Conference Resolution 21(II) and
the Agreed Conclusions which supports India's interpretation of the term "non-discriminatory".  In the
European Communities' view:
(a) The phrase "new preferential concessions … should be made to developing
countries as a whole " included in General Principle Eight means that no
developing country should be excluded a priori  from the GSP and not that
the same preferences should be granted to all Members.
(b) The phrase "in favour of the developing countries" included in paragraph 1 of
Resolution 21(II) is equivalent to the phrase "beneficial to the developing
countries" included in the fourth recital of that Resolution and reproduced in
the 1971 Decision.  The European Communities has already commented
upon the meaning of that phrase;
(c) The passage of the Agreed Conclusions reproduced by India does not address
the meaning of the term "non-discriminatory", but rather the different issue of
whether the donor countries can deny a priori  the condition of beneficiary to
a country on the grounds that it is not a "developing country".  As noted by
India, the conclusion of the Special Committee was that "there is agreementwith the objective  that in principle  all developing countries should  participate
as beneficiaries from the outset".
(d) Likewise, the passage of document TD/56 cited by India is concerned with
the issue of what countries qualify as a "developing country", rather than with
the interpretation of the term "non-discriminatory".  In any event, TD/56 isnot part of the Agreed Conclusions.
4.238  India also cites a document of the UNCTAD Secretariat of 1979 entitled "Review and
evaluation of the generalized system of preferences".  This document, which does not reflect the
views of the donor countries, is a technical document with no legal status.  Clearly, it is not "context"
within the meaning of Article 31 of the Vienna Convention.  Nor is it part of the "preparatory work"
of the 1971 Decision within the meaning of Article 32 of the Vienna Convention.  Thus, it is of little,
if any, relevance for the interpretation of the Enabling Clause.
(v) The Appellate Body report in EC – Bananas III
4.239  In support of its contention that "non-discrimination" means always equality of competitive
opportunities for like products, India cites a passage of the Appellate Body report in EC –
Bananas III.  That passage, however, addresses an entirely different legal issue and does not
constitute a relevant precedent for this dispute.
4.240  The question before the Appellate Body in EC – Bananas III  was not the meaning of the
"non-discrimination" obligations at issue, which was not in dispute between the parties, but rather
whether such "non-discrimination" obligations applied only within each of the tariff regimes
established by the European Communities.  As noted by the Appellate Body, the essence of the
specific "non-discrimination obligations" at issue in EC – Bananas III  is that like products should be
treated equally, irrespective of their origin.  Whether or not other non-discrimination obligations haveWT/DS246/R
Page 51
the same meaning was not a relevant issue in order to decide the matter before the Appellate Body.
Therefore, it cannot be assumed that the Appellate Body also considered those other obligations.  In
particular, there is no indication that the Appellate Body had in mind the "non-discrimination"
requirement in footnote 3 of the Enabling Clause, which was never at issue in  EC – Bananas III .
(c) "Non-reciprocal" in paragraph 2(a)
4.241  India has confirmed that it does not claim that the Drug Arrangements are non-reciprocal.
The European Communities disagrees with India's interpretation of the term "non-reciprocal" but does
not consider it necessary to pursue this issue.
(d) "Beneficial" in paragraph 2(a)
4.242  India has submitted no new arguments in connection with this claim.
(e) Paragraph 3(c)
4.243  In its oral statement, India argued that the "needs" referred in paragraph 3(c) are those of all
the developing countries "in general".  The European Communities has provided a comprehensive
rebuttal to India's arguments as part of its response to the Panel's questions.  In its own response to the
Panel's questions, India introduces the new argument that in the French and Spanish versions, the
equivalent of the words "developing countries" is preceded by the article des and los, respectively.
India contends that the presence of that article means that, in the French and Spanish versions, therelevant needs are "the needs of all developing countries".  Quite remarkably, India reaches this
conclusion by consulting a dictionary definition of the English term the, thus assuming that the uses of
that article in English are identical to those of the French article des and the Spanish article los.
4.244  In any event, if India is correct about the implications of the presence of the articles des and
los in the French and Spanish versions, respectively, it would follow a contrario  that the absence of
the article the in the equally authentic English version means that, as argued by the European
Communities, developed countries must respond to the individual needs of developing countries.  It is
difficult, therefore, to see how this argument advances India's position.
4.245  The European Communities had pointed out that India's interpretation of paragraph 3(c)
would have the absurd result that developed count ries could grant preferences only with respect to
products which are of common interest to all developing countries.  India admits now that the
developed countries may also respond to the individual needs of one or more developing countries by
granting concessions with respect to products whic h are of particular export interest to those
countries.  However, according to India, this response is only permissible provided that those
preferences apply equally to all like products or iginating in all developing countries.  This
qualification, however, has no basis in the text of paragraph 3(c).  Rather, it is premised on India's
mistaken interpretation of footnote 3.
4.246  Moreover, as emphasized elsewhere by India, para graph 3(c) is not a permissive provision.  It
does not say that developed countries may respond to the needs of developing countries, but rather
that they shall  respond to such needs.  If paragraph 3(c) covers the individual "development, financial
and trade needs" of developing countries, and not only their "common" needs, as India appears to
concede now, then all such individual needs must be taken into account and not only those whichconsist of a trade interest in exporting a certain item which is not of interest to other developing
countries.WT/DS246/R
Page 52
3. Article XX of GATT 1994
(a) Drugs pose a risk to human life or health
4.247  India does not contest that narcotic drugs pose a serious risk to human life and health in the
European Communities.
(b) The Drug Arrangements are necessary to fight drug production and trafficking
(i) The values pursued by the Drug Arrangements
4.248  India does not contest that, since the preservation of human life and health is "both vital and
important in the highest degree", the term "necessa ry" must be interpreted by the Panel according to
its broadest possible meaning.
(ii) Contribution of the Drug Arrangements to the protection of human life and health
Tariff preferences are an appropriate response to the drug problem
4.249  India argues that drug production and trafficking are criminal activities and that, for that
reason, it cannot be assumed that tariff preferences will contribute to the objective of replacing those
activities with licit alternative economic activities.  India thus appears to suggest that the only
appropriate and necessary response to the drug problem is the enforcement of criminal laws.
4.250  This contention, which is not supported by any evidence or authority, disregards the most
basic principles of the anti-drug policy agreed within the United Nations over the last 30 years.  Asexplained at length in the European Communities' first written submission, the United Nations have
resolved on many occasions that the fight against drugs requires a "comprehensive and balanced
approach" which  includes initiatives to reduce both illicit demand and illicit supply.  The United
Nations also have resolved that, in order to reduce the illicit supply of drugs, the countries concerned
must adopt comprehensive measures, including not only crop eradication and law enforcement, but
also the development of alternative economic activities.  The United Nations have further
recommended that, in order to support those alternative activities, other countries should provide not
only financial assistance, but also greater market access.  Only a few weeks ago, the ministers
participating in the 46
th session of the Commission on Narcotic Drugs held in Vienna renewed this
recommendation.
4.251  As explained in the European Communities' first written submission, the WTO Agreement
recognizes in the preamble to the Agreement on Agriculture that the countries affected by the drug
problem have particular needs and that providing greater market access is an appropriate response to
such needs.  The same recognition was cited as a justification for the waiver adopted with respect to
the APTA preferences.
The Drug Arrangements apply to all developing countries affected by the drug problem which
do not benefit from more favourable tariff treatment under other arrangements
4.252  India alleges that the Drug Arrangements are not "necessary" because they do not include all
developing countries affected by the drug problem.  Specifically, India argues that Myanmar and
Thailand "are excluded even though they have serious drug problems".
4.253  For reasons already explained, the European Communities considers that Thailand does not
qualify as a country seriously affected by drug production or trafficking.WT/DS246/R
Page 53
4.254  Myanmar is a least-developed country and, as such, is covered by the special GSP
arrangements for LDCs, which provide greater preferences than the Drug Arrangements.  In view of
that, the inclusion of the LDCs affected by the dr ug problem in the Drug Arrangements is unnecessary
in order to protect the life and health of the European Communities' population.
4.255  In any event, the European Communities considers that the exclusion of other developing
countries allegedly affected by the drug problem from the Drug Arrangements is not part of the
"design and structure" of the Drug Arrangements, but rather of its "application" and, therefore, should
be examined under the chapeau  of Article XX.  The European Communities would note that India
appeared to share that view in its first written submission.
The inclusion of developed countries in the Drug Arrangements would be unnecessary
4.256  The Drug Arrangements reflect the recognition that, as noted by the United Nations, "the
problem of the illicit production of and trafficking in narcotic drugs … is often related to developmentproblems".
4.257  In the developed countries, drug production and trafficking have different causes and require
different responses.  Moreover, developed countries have the necessary resources to fight drug
production and trafficking on their own and do not require assistance from other developed countries
in the form of trade preferences.  For those reasons, granting trade preferences to the developedcountries is not "necessary" to protect the life and health of the European Communities' population.
4.258  Moreover, the European Communities is not aware of any developed country which is as
affected by the drug problem as the developing c ountries included in the Drug Arrangements.  India
has identified no such developed country.
The countries not included in the Drug Arrangements do not pose a threat to the sanitary
situation within the European Communities
4.259  As explained, the criteria used in order to select the beneficiaries of the Drug Arrangements
ensure that the excluded developing countries are not a significant source of supply of drugs to the
European Communities and, therefore, do not pose a serious threat to the life or health of the
European Communities' population.
4.260  India argues that that there may be transit countries covered by the Drug Arrangements where
"the trafficked drugs do not flow to the EC".  This argument is purely theoretical and does not take
into account the actual geographical patterns of drug production and trafficking.  The European
Communities, together with the United States, are,  by far, the largest markets for drugs.  The
production of opium and coca products is concentrated in a few countries, all of which supply the
European Communities' market.  The main transit countries surround those producing countries and
are located on the trafficking routes to the European Communities.
It is unnecessary to require that the beneficiaries implement certain anti-drug policies
4.261  In order to ensure that the Drug Arrangements are effective in achieving the objective of
protecting the life and health of the European Communities' population it is not necessary to require
that beneficiaries apply certain anti-drug policies.  The beneficiaries are already subject to a legally
binding obligation to take all appropriate measures  to fight against drug production and trafficking
under the relevant UN conventions.  Furthermore, it is in the beneficiaries' own interest to combat
drug production and trafficking of drugs.WT/DS246/R
Page 54
(iii) There are no less restrictive alternatives
4.262  India alleges that, instead of granting trade preferences, the European Communities should
provide financial assistance or conclude arrangements for administrative cooperation.  Again, India
cites no evidence or authority in support of this contention.
4.263  The European Communities considers that, in accordance with the "balanced and
comprehensive" approach recommended by the United Nations, the measures suggested by India are
complementary rather than alternative to the Drug Arrangements.
4.264  More specifically, the European Communities considers that financial assistance cannot
ensure the sustainability of alternative development activities  For that, it is indispensable to provide
greater market access to the products of such activities.  The UN recommendations cited above, as
well as the Preamble to the Agreement on Agriculture  and the justification for the APTA waiver
support that approach.
4.265  The European Communities considers that, for the above reasons, there is no alternative to
providing greater access to the European Communities' market.  The only issue before the Panel is
whether such access can be provided in a less trade restrictive manner.
4.266  The European Communities is not aware of any alternatives which would be equally effective
and less trade restrictive in order to provide effective market access to the products from thebeneficiaries.  In its first submission, India suggested that the European Communities should grant the
same tariff preferences to all developing countries.  However, this would be much less effective
because those countries which are not handicapped by the drug problem would capture most of the
additional market opportunities created by the tariff preferences.
(c) The Drug Arrangements are applied consistently with the chapeau
4.267  India argued in its first written submission that the Drug Arrangements are not applied
consistently with the chapeau.  The European Communities has addressed those arguments in its first
written submission.  India has not presented any new ar guments in its Oral Statement or in its replies
to the Panel's questions.
G. 
ORAL STATEMENT OF INDIA AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL
1. Introduction
4.268  The European Communities makes a number of arguments which if accepted would have
considerable systemic consequences.
4.269  According to the European Communities, a tariff ad vantage is accorded "conditionally" if it is
accorded as compensation for benefits received from another party.  India would like to emphasize
that, if the grant of tariff preferences conditional upon the situation or policies of exporting countries
were regarded as being consistent with the most-favoured-nation requirement of Article I:1 of GATT1994, this fundamental provision of the world trade order would be rendered inoperative.
4.270  The European Communities further invokes paragraph 2(a) of the Enabling Clause in its
defence and argues that the term "non-discriminat ory" in footnote 3 to the Enabling Clause allows
developed country Members to differentiate between like products originating in developing countries
under the Generalized System of Preferences ("GSP").  The European Communities' interpretation ofthe term "non-discriminatory" would have consequences as far-reaching as its interpretation of the
term "unconditional".  The WTO provides a forum and a legal framework for the negotiation of
reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs andWT/DS246/R
Page 55
other barriers to trade and to the elimination of  discriminatory treatment in international trade
relations.  The application of tariffs on an MFN basis is a crucial factor in providing security and
predictability to the multilateral trading system.  If tariff reductions could be made conditional upon
the situation or policies of the exporting country, the WTO legal system would no longer provide the
required security and predictability and the WTO would lose its attraction as a forum for tradenegotiations.
4.271  The GSP was negotiated and adopted at the UNCTAD for the benefit of developing countries.
It was incorporated into the law of the GATT and the WTO through the 1971 Waiver and the
Enabling Clause.  The developed country Members knew, and accepted in advance, that any
developed country Member may grant, under the GSP, preferential tariff treatment to products
originating in developing countries without accordin g the same treatment to like products originating
in other developed country Members.  That is why developed country Members are referred to as"donors" in the context of the GSP.   However, the Enabling Clause reflects no similar acceptance on
the part of developing countries that any developed country Member may grant preferential tariff
treatment to products originating in some developing countries without according the same treatment
to like products originating in other developing countries.  If the arguments of the European
Communities were accepted, developing countries would have to sacrifice market accessopportunities in developed countries for the benefit of other developing countries and would therefore
also become "donors" in the context of the GSP.  Moreover, they would have to make these sacrifices
on conditions determined by developed countries.  The 1971 Waiver and the corresponding part of the
Enabling Clause were never meant to bring about such consequences and there is no accepted
principle of interpretation that would justify attach ing a meaning to the term "non-discriminatory" that
would entail such consequences.
4.272  If the European Communities' defence under paragraph 2(a) of the Enabling Clause were to
be upheld, in the current tariff negotiations under the Doha Work Programme, developed country
Members will continue to have the assurance that any advantage granted by any developing country
Member to any product originating in any developed country will be accorded immediately andunconditionally to any like product of any other Member.  However, developing country Members
will not have the converse assurance.  The creation of such a lop-sided legal framework would not
merely be a disadvantage to developing country Members.    The WTO's legal framework for tariff
negotiations would be fundamentally altered as far as developing countries are concerned.
4.273  Thus, if the European Communities' defence under paragraph 2(a) of the Enabling Clause
were to be upheld, the damage caused to the rules-based multilateral trading system would be serious
and far-reaching – and most likely, irreparable.
2. The allocation of the burden of proof
4.274  The issue of the allocation of burden of proof has been rendered unnecessarily complex in the
present case.  The European Communities has at various times construed the Enabling Clause as
conferring an "autonomous right", as conferring "a po sitive right", now as conferring "a negative right
and a positive right".  It alleges that the burden of proof should not be placed on the European
Communities, a group of developed countries, because the Enabling Clause was adopted for the
benefit of developing countries.  The European Communities has occasionally drawn implications
beyond the allocation of the burden of proof.  For instance, by characterizing the Enabling Clause as
an "autonomous right", it has attempted to characterize the Enabling Clause as part of the elements of
a claim under Article I:1 of GATT 1994.
4.275  Paragraph 2(a) of the Enabling Clause is an affirmative defence because it does not impose
any independent obligations.  The requirements under paragraph 2(a) arise only after a Member has
chosen to implement a GSP scheme.  India has cited prior GATT cases that have treated the EnablingWT/DS246/R
Page 56
Clause as an affirmative defence.48  As India has explained, the allocation of burden of proof depends
on whether the affirmative of a proposition is an essential element of a claim or a defence.49  T h e
Enabling Clause is not an essential element of India's claim under Article I:1 of GATT 1994.  Rather,
it is an essential element of the European Communities' defence.  Alternatively, in India's view, the
material facts for the resolution of this dispute are uncontested.  Therefore, the Panel need not evendelve into the issue of allocation of burden of proof.
3. The relationship between the Enabling Clause and Article  I:1 of GATT 1994
4.276  The European Communities argues that the phrase "notwithstanding the provisions of the
General Agreement" in paragraph 1 of the Enabling Clause precludes the application of Article I:1 of
GATT 1994 altogether.  India has responded by explaining that the Enabling Clause provides only a
limited exception to Article I:1 of GATT 1994, and that, in granting differential and more favourable
treatment to the developing countries in the context of the GSP, it is not necessary that developedcountry Members be absolved from their obligation to accord MFN treatment to like products
originating in developing countries.  India notes that the European Communities has not responded to
these arguments.
4. The legal interpretation of the term "non-discriminatory" and the UNCTAD
arrangements
4.277  The interpretation of the term "non-discriminatory" in footnote 3 to the Enabling Clause is
crucial to the European Communities' defence.  The European Communities argues that, in the
context of the GSP, the term "non-discriminato ry" permits differentiation between developing
countries that have different development needs (according to objective criteria).  India is of the view
that the term "non-discriminatory" in the context of  preferential tariff treatment under the GSP means
that there cannot be any differentiation between li ke products originating in developing countries.
4.278  The textual basis for India's interpretation of the term "non-discriminatory" is the following:
• Paragraph 2(a) of the Enabling Clause refers to "preferential tariff treatment accorded by
developed contracting parties to products originating in developing countries in accordancewith the Generalized System of Preferences".
• Footnote 3 refers to the GSP as that which is "described in the Decision of the
CONTRACTING PARTIES of 25 June 1971, relating to the establishment of 'generalized,non-reciprocal and non discriminatory preferences beneficial to the developing countries'".
• The GSP as described in the 1971 Waiver is therefore incorporated into the Enabling Clause
by way of reference.
• Paragraph (a) of the 1971 Waiver refers to "the preferential tariff treatment referred to in the
"Preamble to this Decision …".  Thus, the prefer ential tariff treatment referred to in the
Preamble to the 1971 Waiver was incorporated by reference into the Enabling Clause.
• The Preamble to the 1971 Waiver refers to the "mutually acceptable arrangements" … that
"have been drawn up in the UNCTAD concerning the establishment of generalized, non-
discriminatory and non-reciprocal preferential tariff treatment in the markets of developed
countries for products originating in developing countries".
                                                     
48 Panel Report, US – Customs User Fee , and Panel Report, US – MFN Footwear , see second written
submission of India, para. 56.
49 Ibid. , para. 48.WT/DS246/R
Page 57
• The term "non-discriminatory" in footnote 3 to the Enabling Clause therefore has the same
meaning as that attributed to it in the arra ngements that had been drawn up in the UNCTAD.
• As evidence of those arrangements at the UNCTAD, India has presented the Agreed
Conclusions, particularly that portion thereof which states that "there is agreement with theobjective that in principle all developing countries should participate as beneficiaries from the
outset".
• As context to this agreement, India has likewise cited the statements of the developing
countries and of the preference-giving countries that are annexed or referred to in the Agreed
Conclusions which support its interpretation.
4.279  The European Communities dismisses the lega l relevance of the UNCTAD arrangements,
characterizing UNCTAD resolutions as "not legally binding".  The European Communities likewise
refers to the Agreed Conclusions as not reaching "the status of a formal UNCTAD resolution or
decision".  The Panel need not resolve the issue of the legal status of the UNCTAD resolutions and
the Agreed Conclusions within the law of the UN.  It is sufficient for the Panel to note that the
Enabling Clause refers to the GSP referred to in  the 1971 Waiver and that  the 1971 Waiver in turn
refers to the "mutually acceptable arrangements" that "have been drawn up in the UNCTAD".
Regardless of the formal status of those mutually acceptable arrangements under the law of the UN,those arrangements define the legal scope of the Enabling Clause.  The European Communities'
dismissal of the legal relevance of the Agreed Conclusions renders footnote 3 incoherent or
inoperative as it would be impossible to determine the nature of the "preferential tariff treatment"
described in the preamble to the 1971 Decision without  referring to the Agreed Conclusions.  It is
further noteworthy that the European Communities ha s not provided any evidence as to any mutually
acceptable arrangements drawn up in the UNCTAD that support its position.  In particular, the
European Communities has not provided any evidence that the term "non-discriminatory" in the
context of the GSP, as referred to in footnote 3 to the Enabling Clause and the 1971 Decision, was
meant to permit developed country Members to differentiate between developing countries.
5. Paragraph 3(c) of the Enabling Clause
4.280  The European Communities argues that, if developing countries could not be treated
differently, paragraph 3(c) of the Enabling Clause could not be complied with.  The European
Communities' understanding of paragraph 3(c) and its relationship with paragraph 2(a) is erroneous.
As India has demonstrated in detail in its second written submission, the legal function of
paragraph 2(a) is to permit tariff preferences under the GSP, and that of paragraph 3(c) is to ensurethat the depth of tariff cuts and product coverage under GSP schemes are responsive to the needs of
developing countries.  A developed country can therefore perfectly well comply with the obligation to
accord the same tariff cuts to all developing countries and the obligation to respond to the needs of
developing countries.
4.281  The European Communities' argument depends on a reading of paragraph 3(c) as referring to
the needs of "individual" developing countries.  India has pointed out that neither the text nor the
context of paragraph 3(c) supports such a reading.  India pointed out in particular that other provisions
of the Enabling Clause explicitly refer to "individual" needs of developing countries while
paragraph 3(c) does not.  The European Communities has not rebutted any of these arguments.  India
further pointed out that that the European Communities' reading of paragraph 3(c) would render most
of its own GSP and that of all other developed countries inconsistent with this provision.  In response,
the European Communities argues that  paragraph 3(c) "does not require that each preference must beresponsive at the same time to the individual development needs of each and every developingWT/DS246/R
Page 58
country" and that "indeed that would be a logical impossibility".50 India submits that the European
Communities is contradicting itself by claiming at the same time that paragraph 3(c) requires a
positive response to the individual needs of developing countries and that this requirement would be a
logical impossibility.
4.282  The European Communities contends that India has conceded that paragraph 3(c) refers to
individual needs.51  India has not done so.  In response to a specific question from the Panel, India
merely pointed out that even if paragraph 3(c) were interpreted to refer to individual needs, this could
be reconciled with the India's interpretation of the term "non-discriminatory" by variations in the
choice of products so as to benefit particularly needy counties.52
4.283  The European Communities characterizes paragraph 3(c) in its second submission as "worded
in rather imprecise terms", and it claims that "it ma y be argued that its is a purposive provision, which
informs the interpretation of the other provisions of the Enabling Clause, but does not, of itself,impose any legally binding obligation".
53   The European Communities thus relies on a provision
which it characterizes as "worded in imprecise terms" that "does not impose any legally binding
obligation" to justify an interpretation of "non-discriminatory" according to which the developing
countries would loose their rights under Article I:1 of GATT 1994.  The European Communities uses
paragraph 3(c) as contextual support for an interpretation that expands the  rights of developedcountries but at the same time declares that this provision establishes no obligation for developed
countries.  The Panel should reject this attempt to have the cake and eat it.
4.284  The inclusion of paragraph 3(c) in the Enabling Clause cannot have the far reaching
consequences that the European Communities assumes.  Ultimately, the arguments of the European
Communities for its negative conception of "non-discrimination" have no firm basis inparagraph 3(c).  Instead, the European Communities' conception is based on a policy argument that a
unilateral power to differentiate between developing countries would be beneficial.
4.285  The European Communities contends that there are considerable difficulties which result
from accepting India's interpretation of "non-discriminatory" because it would "effectively deprive the
developing countries with special needs from equal development opportunities".
54
4.286  This policy argument is without merit.  The   neediest of the developing countries are already
accommodated by the special provision for least-developed countries in paragraph 2(d).  Moreover, in
respect of other developing countries, where there is a good case for differentiation, the waiver
mechanism is available.  In fact, the WTO Members have granted waivers for measures similar to the
Drug Arrangements and for trade measures benefitin g the ACP countries.  Thus, India's interpretation
does not prevent accommodating differences between developing countries in accordance with the
collective will of the Members.  What India's interpretation merely prevents is that special needs ofparticular countries be unilaterally determined by developed countries.  The question is thus not
whether special needs can be accommodated through trade preferences, but (i) whether the developed
countries should be able to do this unilaterally and in complete disregard of the legitimate interests of
other countries with different but equally pressing needs or (ii) whether they should do so by resorting
to the proper WTO procedures.
                                                     
50 Replies of the European Communities to questions from the Panel to both parties and third parties,
para. 167.
51 Second written submission of the European Communities, paras. 51-52.
52 Reply of India to question No. 15 from the Panel to both parties.  The European Communities cites
India's replies to questions Nos. 16 and 17 from the Panel to both parties which do not record any concession on
this point.
53 Replies of the European Communities to questions from the Panel to both parties and third parties,
para. 57.
54 First written submission of the European Communities, para. 84.WT/DS246/R
Page 59
6. Alternative arguments on non-discrimination
4.287  The European Communities has so far failed to demonstrate that the Drug Arrangements are
consistent with the concept of non-discrimination that it attempts to introduce into WTO law.  Under
the European Communities' interpretation, objective criteria have to be established by the preference-
giving country, and the preferential tariff treatment must be granted equally to all developingcountries meeting those criteria.  The European Communities contends that the designation of the
beneficiary countries under the Drug Arrangements is made in accordance with "objective, non-
discriminatory criteria".
55 The European Communities claims that these criteria capture the possibility
of trafficking to the European Communities, as well as the effects of the drug problem on individual
countries.  However, the European Communities states that the criteria are not contained in a public
document56 and that it is not necessary to publish the relevant criteria.57 The European Communities
has not furnished these criteria to the  Panel.
4.288  India would further like to note that:
• The European Communities has not made available to India or to the Panel any
documentation reflecting an evaluation of all developing countries' drug profiles for inclusion
into the Drug Arrangements.  It contends that this documentation is not public.58 However,
elsewhere, the European Communities states that this evaluation is based on publicly
available information.59
• The European Communities has failed to furnish India with document 15083/01 concerning
the inclusion of Pakistan as a beneficiary under the Drug Arrangements and has failed to
furnish any document demonstrating why India was excluded from the Drug Arrangements.60
• The European Communities states that its authorities do not utilize any "quantitative or
qualitative threshold."61 The absence of a quantitative or qualitative threshold conclusively
indicates that no objective criteria were applied.
4.289  The European Communities' concept of "non-discri mination" logically implies that there is a
criterion equally applicable to all developing countries and justifying the more favourable treatment of
some of them.  In other words, its concept implies a right to rank the needs of developing countries inaccordance with objective criteria.  Yet, the Europ ean Communities has so far failed to indicate the
criteria that it applied when deciding that the needs of the beneficiary countries rank higher than the
needs of India and other developing countries.  All that has been heard so far from the European
Communities is that the needs of the beneficiary countries are different from those of India.
However, the European Communities has not explained why the needs of the 12 beneficiaries deservespecial preferences, while those of India and other developing countries do not.
4.290  The European Communities' concept of non-discrimination further implies that the increased
market access opportunities accorded under the Drug Arrangements are in effect targeted to resolve
the drug-related problems of the 12 beneficiaries.  The factual underpinning of the European
                                                     
55 Ibid., para. 116.
56 Replies of the European Communities to questions from India, para. 5.
57 Replies of the European Communities to questions from the Panel to both parties and third parties,
para. 136.
58 Replies of the European Communities to questions from India, para. 12
59 Replies of the European Communities to questions from the Panel to both parties and third parties,
para. 144.
60 Replies of the European Communities to questions from India, para. 21.
61 Replies of the European Communities to questions from the Panel to both parties and third parties,
para. 145.WT/DS246/R
Page 60
Communities' claim, on which it justifies the exclusi on of India and other developing countries, is that
Drug Arrangements resolve problems that India and other developing countries do not have.  In fact
however, the increased market access opportunities help resolve a large variety of development needs
of the beneficiaries, including the need to reduce unemployment, the need to attract investments and
the need to improve their external financial position.  The Drug Arrangements thus help resolve to alarge extent problems of the beneficiaries that are identical to those of India and other developing
countries.  The factual unpinning of the European Communities' claim is therefore baseless.
H. 
ORAL STATEMENT OF THE EUROPEAN COMMUNITIES AT THE SECOND SUBSTANTIVE MEETING
OF THE PANEL
1. Relationship between Article I:1 of the GATT and the Enabling Clause
(a) The Enabling Clause is not an "affirmative defence"
(i) The Enabling Clause recognizes an "autonomous right"
4.291  According to India, the Enabling Clause is not an "autonomous right" because the measures
falling within its scope would otherwise be prohibited by Article I:1 of GATT 1994.  However, the
same is true of Article 27.2 of the SCM Agreement  and Article  3.3 of the  SPS Agreement.  Yet, this
did not prevent the Appellate Body from concluding  that these two provisions are not affirmative
defences.  Rather, according to the Appellate Body, Article 27.2 of the SCM Agreement andArticle 3.3 of the SPS Agreement exclude a priori  the application of Articles 3.2 of the SCM
Agreement and 3.1 of the SPS Agreement, respectively.  Likewise, the Enabling Clause excludes the
application of Article I:1 of GATT 1994 and, therefore, cannot be characterized as an affirmative
defence justifying a violation of that provision.
4.292  India's argumentation with regard to Article 2.1 of the SPS Agreement falls short because
Members have the right to apply customs duties consistently with their WTO obligations.  Moreover,
the Appellate Body nowhere referred to Article 2.1 but to Article 3.3 whose wording is equivalent to
that of paragraph 1 of the Enabling Clause.
(ii) The Enabling Clause imposes "positive obligations"
4.293  According to India, the Enabling Clause does not impose "positive obligations" because
developing countries cannot "compel" developed countries to establish a GSP scheme.  However, the
same could be said of many other WTO provisi ons, including Article I:1 of GATT 1994, which are
not "affirmative defences" because  Members are free to decide whether or not to levy customs duties
on imports and, if so, at which level.  Similarly, under the Enabling Clause, the right to grant
differential and more favourable tariff treatment is subject to certain "positive obligations" set out in
paragraphs 2 and 3 of the Enabling Clause, including the obligation that the preferences granted as
part of a GSP scheme must be "non-discriminatory".
4.294  On India's interpretation, other WTO provisions which have been recognized not to be
"affirmative defences" would be found to impose no "positive obligations" such as Article 27.4 of the
SCM Agreement, Article 3.3 SPS Agreement, Articl e 6 of the Agreement on Textiles and Clothing or
Articles VI and XIX of GATT 1994.  Yet, in all these cases although they are not compelling they
have been recognized by the Appell ate Body as "positive obligation".
(iii) Previous panels have not treated the Enabling Clause as an affirmative defence
4.295  India's argument that previous disputes panels ( US – Customs User Fee  and US – MFN
Footwear ) have treated the Enabling Clause as an affirmative defence is not correct either because the
Panel made no respective finding or because it was not invoked by the defendant.WT/DS246/R
Page 61
(iv) The report of the Appellate Body in Brazil – Aircraft supports the European Communities
position
4.296  India's interpretation on Article 27.4 falls short because the Appellate Body relied on the fact
that Article 27 is intended to provide Special and Differential Treatment and in any event, like
Article 27.4 of the SCM Agreement, the Enabling Clause does impose positive obligations.  Finally,contrary to India's assertion, whether or not the Enabling Clause is an affirmative defence, cannot
depend on the identity of the complaining party in each particular case.  India's suggestion that the
violation of the Enabling Clause will always be  invoked by a developing country vis-à-vis a
developed country is incorrect.  The Enabling Clause also accords to developing countries the right to
grant certain forms of differential and more favourable treatment.  Thus, a developed country, or
another developing country, could invoke a violatio n of the Enabling Clause by a developing country.
(b) India has the burden to prove that Article I:1 of the GATT applies to the Drug Arrangements
4.297  India further misinterprets that the burden of proof "must be assessed in relation to the
material elements of the plaintiff's claim" and that since India's only claim in this dispute is that the
Drug Arrangements are inconsistent with Article I:1 of GATT 1994, and not with paragraph 2(a), it is
for the European Communities to prove that the Drug Arrangements fall within paragraph 2(a).  A
provision of the WTO Agreement either is or is not  "in the nature of" an affirmative defence.  The
Enabling Clause is not "in the nature" of an affirmative defence, and it does not become one simply
because it is invoked by the defendant in a particular dispute.  This is evident from the cases Brazil –
Aircraft  and EC – Hormones.
4.298  Regarding the burden of proof, India's reference to the Appellate Body report in US – Wool
Shirts and Blouses  does not address the issue of what is an "affirmative defence", as opposed to the
negative of the claim asserted by the complaining party.  Based on the jurisprudence in Brazil –
Aircraft  India bears the burden of proving that Article I:1 of GATT 1994, and not the Enabling
Clause, apply  to the measure in dispute.  India's interpretation would have other unacceptable
consequences.  For example, a Member complaining against an anti-dumping or a countervailing
measure could limit itself to assert a claim based on Articles I or II of GATT 1994, and then it wouldbe for the defendant to prove that such measure is consistent with Article VI of GATT 1994 and the
Anti-Dumping Agreement or the SCM Agreement, respectively.
4.299  Finally, in view of India's assertion that it is not making any claims under the Enabling
Clause, the European Communities would submit that, if the Panel were to agree that the Drug
Arrangements fall within paragraph 2(a) of the Enabling Clause, rather than within Article I:1 of
GATT 1994, it should refrain from examining whether the Drug Arrangements  are consistent with
paragraph 3(c) of the Enabling Clause.
(c) The Enabling Clause excludes the application of Article I:1 of the GATT
4.300  India's contention that the Enabling Clause excludes the application of Article I:1 "only to the
extent that the granting of tariff preferences under the GSP would be prevented if the introduction of a
measure were not allowed" has no basis on the text of the Enabling Clause.  Accordingly, the only
issue before the Panel is whether the Drug Arrangements fall within paragraph 2(a).  India's thesis isalso contradicted by paragraphs 2(c) and 2(d) as these two subparagraphs allow differentiation
between developing countries, even though such differentiation is no more "necessary" to provide
differential and more favourable treatment to developing countries than it would be within the context
of a GSP.
4.301  The European Communities would underline that the Enabling Clause is not an "exception"
but one of the main forms of Special and Differential Treatment, which in turn is one of the pillars of
the WTO Agreement.  The purpose of Special and Di fferential Treatment is to respond to the specialWT/DS246/R
Page 62
needs of developing countries.  Differentiatin g between developing countries with different
development needs is fully consistent with such an objective.  In any event, the Appellate Body has
made it clear that there is no presumption that "exceptions" should be interpreted "strictly" or
"narrowly".
(d) The meaning of "unconditionally" in Article I:1 of the GATT
4.302  In its second written submission India limits itself to arguing that the Drug Arrangements are
not covered by the Enabling Clause and, as a result, are inconsistent with Article I:1, inter alia
because they are "not unconditional".  Since the Drug Arrangements fall within the Enabling Clause,
the Panel does not need not to reach the issue of whether they are "conditional" for the purposes of
Article I:1.
4.303  In this respect, India's argument on the ordinary meaning of "unconditional" is of little value
because it leaves undefined the meaning of "conditio n".  As to the context, it is clear that MFN
clauses can be either "conditional" or "unconditional".  And that this notion must have identical
meaning in relation to both types of clauses.  Thus, the Draft Articles on the MFN Clause  of the
International Law Commission give a single definiti on of condition which applies to both conditional
and unconditional MFN clauses.  Finally, Arti cle I:1 of GATT 1994 contains two different
obligations, which are: first, to grant MFN tr eatment; and, second, to do so "immediately and
unconditionally".  To say that a distinction based on the "situation" of a country is not a "condition" is
not the same as saying that such distinction is consistent with Article I:1.
2. The Enabling Clause
(a) The meaning of "non-discriminatory" in paragraph 2(a)
(i) The GATT context
4.304  Contrary to India's assertion, no definition  of the term "non-discrimination" in the sense of
equal competitive opportunities to like products originating in different countries exists under the
GATT.  India's quotation from the Appellate Body report in EC – Bananas  III is not relevant here as
emphasized in the same report by the Appellate Body.  The term "discrimination" may have different
meanings in different WTO contexts as noted by the panel in Canada – Pharmaceutical Patents .  The
Enabling Clause, like all the other provisions granting Special and Differential Treatment, does not
seek to provide equal competitive opportunities for like products of different origins but it intends to
create unequal competitive opportunities in order to respond to the special needs of developing
countries.
(ii) Paragraph 2(d)
4.305  Contrary to India's argument, paragraph 2(d) is not an "exception" but is one of the forms of
differential and more favourable treatment to which paragraph 1 "applies" and, therefore, stands onthe same level as paragraph 2(a) with respect to paragraph 1.  This does not render paragraph 2(d)
"redundant and meaningless" but  while the two provisions overlap, the scope of paragraph 2(d) is
broader in some significant respects than that of paragraph 2(a), for example, with regard to
"preferences/special treatment" and the context in which measure is provided.  As for paragraph 2(b),
it has a more limited scope than paragraph 2(d) and is intended to cover the Special and DifferentialTreatment provisions contained in the Tokyo Round plurilateral agreements while paragraph 2(d)
covers any "special treatment" with regard to any non-tariff measure.WT/DS246/R
Page 63
(iii) The use of "the" before "developing countries"
4.306  India's argument in this regard has the immediate a contrario  implication that whenever the
term "developing countries" is not preceded by the it means that the preferences may be granted to
some developing countries.  The use of the word "the" in the English, Spanish and French versions of
the Enabling Clause is very disperse.  Moreover, both in French and in Spanish, articles are morefrequently used than in English and India's interpretation would render the Spanish and French
versions internally inconsistent, in particular in view of paragraph 1, 2(c) and 2(d).  In addition,
India's interpretation of the term "other Members" in paragraph 1 as meaning "the developed
Members" would lead to conflicting meanings when read in conjunction with each of the
subparagraphs of paragraph 2.
(iv) The UNCTAD Arrangements
4.307  The Agreed Conclusions do not prohibit expressly such differentiation.  The only provision in
the Agreed Conclusions which is relevant to the issue of differentiation between developing countries
is that the preferences should be "non-discriminatory".  Thus, on the issue before the Panel, the
Agreed Conclusions add nothing to what is alr eady said in the Enabling Clause.  The Agreed
Conclusions do no purport to establish an exhaustive regulation of the GSP's but they take note of the
statements of intentions made by the prospective donors and record the agreement (and sometimes thelack of agreement) of all the participants in the consultations sponsored by UNCTAD with regard to
certain basic objectives.  For that reason, the silen ce of the Agreed Conclusions on a certain issue can
never be considered as dispositive.
4.308  As to the least-developed countries, Part V of the Agreed Conclusions records a series of
agreed objectives and statements of intention by the prospective donor countries with a view toresponding to the special needs of the least-developed countries.  The donor countries are free to go
beyond those objectives and statements of intentions, subject to the general requirement that
preferences must be inter alia  "non-discriminatory".
4.309  India's reference to the Agreed Conclusions that "in principle all developing countries should
participate as beneficiaries from the outset" does not address the different question of whether thedeveloping countries already designated as beneficiaries of a GSP should be granted the same
preferences.  The objective cited by India was aimed at preventing donor countries from excluding
a priori  certain developing countries from their GSPs on grounds unrelated to their development
needs (namely, the fact that they granted reverse preferences to certain developed countries).  The
European Communities' interpretation of "non-discriminatory" does not allow differentiation on such
grounds because under the European Communities' GSP all developing countries are recognized as
beneficiaries and all of them benefit from preferences.
(v) Paragraph 3(c) and policy arguments
4.310  India has not provided new arguments on paragraph 3(c) and it has produced a series of
unwarranted trade policy concerns.  The European Communities, therefore, refers to its previous
responses.
(b) The Drug Arrangements are "non-discriminatory"
4.311  The European Communities has explained what are the criteria used in order to select the
beneficiaries of the Drug Arrangements.  India does not address the adequacy as such of those criteria.
Nonetheless, it argues that they are not "objective" because they are not set out in the GSP Regulation.
Yet, the fact that the selection criteria are not stated in the GSP Regulation does not prejudge of their
objectivity.  The European Communities has already explained why it is not necessary to publish theselection criteria or to lay down procedures to appl y for inclusion or for removing countries from theWT/DS246/R
Page 64
Drug Arrangements.  As to the selection of the beneficiary countries, the burden of proof is on India.
Yet, the European Communities has explained why India, Indonesia, the Philippines, Thailand and
Paraguay are not included in the Drug Arrangements.
3. Article XX of GATT 1994
(a) The Drug Arrangements are "necessary" for the protection of human life and health
4.312  By suggesting that a measure must be specifically designed to protect human life and health,
India is introducing a requirement which is nowhere st ated in Article XX(b).  All that is required by
that provision is that a measure must be "necessary" to protect human life or health.  Article XX(b)
does not require that the protection of human life or health must be the only, or even the main
objective of the measure concerned.  In any event, to the extent India refers to the Explanatory
Memorandum, this is a preparatory document with no legal status.  Yet, achieving the objective of
combating drugs would have the necessary consequence of also achieving the objective of protectingthe life and health of the European Communities' population.
4.313  As to the relevance of the "contribution", the European Communities has already explained
that the Drug Arrangements are an "important" co mponent of the European Communities' drug policy
and, more specifically, that they are a "necessary complement" to the financial and technical
assistance provided to the beneficiaries.  India's assumption that the fight against drug production andtrafficking is simply a matter of law enforcemen t is at odds with the relevant United Nations
recommendations.  These recommendations were recognized by the Indian delegation at the occasion
of the adoption of the 1998 Action Plan.
4.314  In this context, it is important to develop other economic alternatives besides crop substitution
in order to absorb the excess manpower generated by the eradication of drug cultivation in rural areas,as well to prevent the unemployed of the urban and transit areas from joining the drug industry.
Finally, India's suggestion that the Drug Arrangements would provide an incentive for the
beneficiaries to refrain from combating drug production and trafficking is as absurd as suggesting that
the general GSP arrangements provide an incentive for India to refrain from adopting appropriate
development policies.  Finally, as for technical and financial assistance it is important that tradepreferences are a necessary complement to such assistance, rather than an alternative.  Licit
alternative activities cannot be dependent indefinitely on foreign subsidies.  They must be sustainable,
and this requires the opening of foreign markets for the output of such activities.
(b) The Drug Arrangements are applied consistently with the chapeau
4.315  With respect to the chapeau of Article XX, the European Communities recalls that the
essential substantive feature of the measure in dispute, and the one which, according to India, makes it
inconsistent with Article I:1 of GATT 1994, is the tariff differentiation between the beneficiaries andother countries which are not affected by the drug problem.  The European Communities argues that
such differentiation is "necessary" in order to protect the life and health of its population.  If the Panel
were to agree that such differentiation is "necessary" for that purpose and, therefore, that the measure
is prima facie justified under Article XX(b), it would be illogical to examine again such
differentiation under the chapeau.  Rather, the issue to be examined under the chapeau is whether theapplication  of such differentiation is discriminatory.WT/DS246/R
Page 65
V. ARGUMENTS OF THE THIRD PARTIES
A. THE ANDEAN COMMUNITY
1. Introduction
5.1 The Governments of Bolivia, Colombia, Ecuador, Peru and Venezuela (referred to jointly as
the Andean Community) submit that the Drug Arra ngements do not constitute a violation of the
European Communities' WTO obligations.  The Enabling Clause must be seen as a self-standing
regime which affirmatively establishes how developed countries are to assist developing countries.
The Enabling Clause and the GSP that it authorizes are the most concrete and relevant forms of
special and differential treatment granted by developed countries in favour of developing countries.
As such, GSP schemes are key to the participation of developing countries in the world trading
system.  It is impermissible to see the Enabling Clause as just an exception.
5.2 The Andean Community contends that th e European Communities system of tariff
preferences, including the Drug Arrangements, does fall within the scope of the Enabling Clause. The
Drug Arrangements do not violate the Enabling Clause; rather, they are a proper application of it.
5.3 The Andean Community argues that preferen ce-giving countries can differentiate between
developing countries, and the Drug Arrangements, in so differentiating, do not violate the Enabling
Clause.  The term "non-discriminatory" should not be equated with the most-favoured-nation (MFN)
principle, rather, it should be interpreted in a way that allows for differentiation that addresses the
drug-related development needs.
5.4 The Andean Community believes that drug problems are an internationally recognized
problem and that the international community shoulder shared responsibility for the war on drugs.
The European Communities' Drug Arrangements represent a positive response that contributes toalleviating the enormous burden of the drug problem by fostering the development of agriculture and
industrial alternatives to drug production and trafficking.
2. The important implications of this dispute for the Andean Community
5.5 The Andean Community argues that it has a vital interest in the preservation of the Drug
Arrangements and in the outcome of this case.  The destabilizing effects of the production andtrafficking of illicit drugs on economic and legal institutions, civil societies and political systems of
countries of the Andean Community are notorious.  The Drug Arrangements are intended to provide
assistance to beneficiary countries with severe drug production and trafficking problems in their
efforts to create alternatives to drug activities, while fostering sustainable development.  Accordingly,
Bolivia, Colombia, Ecuador, Peru and Venezuela are all beneficiaries of the Drug Arrangements and
are all countries with severe drug-related problems.
62
5.6 The Andean Community claims that the intern ational community has recognized the multiple
negative effects of drugs in Bolivia, Colombia, Ecuador, Peru and Venezuela.  As the 2002 annual
report of the International Narcotics Control Board (INCB) put it: "the drug problem in South
America, particularly in the countries in the Andean sub-region has increasingly been linked to
political issues and national security issues".63 The Andean Community states that the Andean region
has very particular developmental challenges brought about by the continued cultivation and
                                                     
62 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 5, where in
footnote 3 it refers to the paras. 126-131of the First written submission of the European Communities.
63 [emphasis original] Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela
And, para. 7, where in footnote 4 it refers to the para. 316 of the First written submission of the EuropeanCommunities and the INCB 2002 Annual Report, annexed thereto as Exhibit (EC-5).WT/DS246/R
Page 66
trafficking of illegal drugs.  The degree of harm caused to the region's social and economic
development by drug cultivation and trafficking is unparalleled in any other region of the world.  The
drug trade has been the root-cause of many of these problems.  It has for many years, and continues
today, to fuel activities aimed at destabilizing the region.
5.7 The Andean Community further notes that the negative impact of drug production and
trafficking on the economic growth of Andean coun tries has been the subject of numerous studies64,
pointing out that the sources-of-growth decomposit ion shows that this reversal can be accounted
entirely by changes in productivity.  The time series analysis suggests that the implosion of
productivity is related to the increase in criminality which has diverted capital and labour to
unproductive activities.  In turn, the rise in crime has been the result of rapid expansion in drug
trafficking activities, which erupted around 1980.
5.8 The Andean Community contends that the huge cost of the "War on Drugs" represents
billions of dollars to the Andean countries in financial terms and prevents adequate and much needed
spending on education, healthcare, environmental, infrastructure and other development-focused
programmes.  In addition to this heavy financial bur den, the cost of the 'War on Drugs' to social and
economic development may be unquantifiable.  Over the years, the fight has cost countless lives and
has led to the displacement of hundreds of thousands of people.  According to the AndeanCommunity, these and other adverse socio-economic consequences have all been well-documented by
the world's major international aid donors, development agencies and human rights organizations .
5.9 The Andean Community further argues that sh ared responsibility for the problem of illicit
drugs production and trafficking has been recognized by the General Assembly of the United
Nations.
65 According to the Andean Community, the Drug Arrangements were explicitly a response to
a plea for support from countries comprising the Andean Community, which stressed to the European
Communities that drug production and trafficking seriously undermines social integrity and impairs
economies to the point of jeopardizing development.66 As such, the preferences are a positive
response that alleviate the enormous cost to its ec onomies and societies of this plague by fostering the
development of alternatives (agricultural and industrial) to drug production and trafficking.
5.10 The Andean Community contends that the Drug Arrangements are meaningful to its
members.  In 2000, the Andean Community's exports to the European Communities under this special
regime amounted to US$1.275 billion (22.8 per cent of the total exports of the Andean Community to
the European Communities).  Likewise, the gross value of the production under this regime was
US$2.532 billion, generating around 159,000 jobs.67 More specifically, the gross value of the
production under the GSP special regime represented in 2000, US$1 billion for Venezuela, US$678
million for Peru, US$494.5 million for Colombia, US$245 million for Ecuador, and US$78 million inthe case of Bolivia.  Likewise, the benefits of this regime in terms of direct and indirect employment
in 2000 reached 53,100 jobs for Ecuador, 45,700  for Colombia 33,600 for Venezuela, 23,900 for
Peru and around 3,000 for Bolivia .
68
                                                     
64 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 11, where in
footnote 5 it refers to Exhibit (EC-7) annexed to the First written submission of the European Communities.
65 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 15, where in
footnote 9 it cites the General Assembly of the United Nations, A/RES/56/124 of 19 December 2001.
66 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 12, where in
footnote 6 it refers to the preamble of Council Regulation 3835/90 of 20 December 1990 amending Regulations
(EEC) No 3831/90, (EEC) No 3832/90 and (EEC) No 3833/90 in respect of the system of generalized tariff
preferences applied to certain products, OJ L 370/126.
67 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 13, where in
footnote 7 it cites SG/di 416;  6 June 2002;  Andean Community:  The Advantages of the GSP Special Regime.
68 Ibid.WT/DS246/R
Page 67
5.11 The Andean Community concludes that the remo val of GSP benefits would not only have a
detrimental impact on the economic and social development of Andean Community, but it will also
impair the "War on Drugs".  It jeopardizes vital tools for the economic and social development of the
countries that comprise the Andean Community.
5.12 Bolivia  states in its separate oral statement that from 1989 to 2002, there was an 80 per cent
reduction in coca production in Bolivia from 40,000 hectares to 8,000 hectares.  Meanwhile, a number
of large cartels in Bolivian territory were dismantled, and 16,439 production plants and laboratories
together with 25,579 maceration pits were destroyed.  These results were obtained through the
implementation of a series of programmes which could not have been financed by the National
Treasury – indeed, 79 per cent is covered by international cooperation.  Territories that were under
illicit crops have now been replaced by altern ative development product cultivation zones, and
Bolivia has become a pioneer in the sustainable management of resources.69
5.13 Bolivia claims that a large proportion of the measures implemented to combat drug problem
have been made possible through mechanisms such as the Drug Arrangements.  Poverty and the lack
of opportunities and alternatives have led a portion of its rural population to cultivate coca leaves.
Without the alternative development programme s, the "New Commitment to Fight Drugs 2003-2008"
that Bolivia presented at the 46th session of the Commission on Narcotic Drugs would be more
difficult to implement.70
5.14 Colombia argues that drug production and trafficking takes on a particular and special form in
each country and varies according to the geographical region.  In Colombia, the combined problem of
drugs and terrorism in recent years has evolved to such an extent that it presents a medium- and long-
term threat not only to Colombia but also to the enti re world.  Drug trafficking has resulted in loss of
productivity over the last ten years as well as many lives.71
5.15 Colombia considers that the principle of shared responsibility endorsed by the United Nations
is an expression of the world's commitment to tackle this grave problem on a collective basis.  This
principle recognizes the situation of Colombia as having a special development need and links market
access to the fight against the production and distribution of illicit substances.  The practice ofproviding special preferences has existed for more than ten years.  The preferences are of considerable
significance in the fight against drug production and distribution.  To deny the European Communities
the possibility to respond positively to the needs of these developing countries would result in the loss
of approximately 40,000 jobs in Colombia.
72
5.16 Ecuador claims that as a poor country, the temptation of easy and much higher gains from
drug trafficking compared to low profits from producing coffee or cacao is an important factor behind
its drug problems. Government spending on eradication of illicit drug production has reducedfinancial input for other development-related programmes, such as poverty reduction, education,
health, infrastructure and environment.  The extent of damage caused by drug trafficking to Ecuador's
social and economic development is unparalleled in any other part of the world.
73
5.17 Ecuador points out that the Drug Arrangements have created a broader opportunity for
diversifying its export production and generated greater income and more employment in the country.Nonetheless, the Drug Arrangements are only pa rt of the response to the immense complications
                                                     
69 Oral statement of Bolivia, paras. 12, 13 and 15.
70 Oral statement of Bolivia, paras. 14 and 17.
71 Oral statement of Colombia, paras. 5, 7 and 12.
72 Oral statement of Colombia, paras. 9, 10, 13 and 15.
73 Oral statement of Ecuador, pp.1-2.WT/DS246/R
Page 68
posed by drug trafficking.  It is Ecuador's view  that dismantling the Drug Arrangements would have
adverse consequences for Ecuador's more vulnerable population.74
5.18 Peru contends that the harmful effects of the drug problem include the loss of export
opportunities and the diversion of production efforts to illicit activities.  Technical and financial
assistance is not sufficient in the combat against drugs.  Peru maintains that the Drug Arrangementsregime is a key tool for the economic development of the beneficiary countries by helping them to
diversify their crops and generate alternative and lawful economic activities.  The dismantling of the
preferences would obviously have undesirable effects on Peru's economy.  In this regard, it has not
been satisfactorily shown that the cost of these benefits is being assumed by other countries not
benefiting from the Drug Arrangements.
75
5.19 Venezuela states that it is facing a serious drug trafficking problem.  Venezuela has been a
beneficiary of the Drug Arrangements since 1995.  The Drug Arrangements contribute to moderating
the high economic and social costs that these drug-affected countries have had to assume, notably due
to unemployment resulting from the reduction of il licit crops.  The elimination of these preferences
would have a negative impact on Venezuela's economic and social development and would aggravate
underdevelopment and poverty.76
5.20 Venezuela argues that paragraph 3(c) of the Enabling Clause permits differentiation among
developing countries and does not require that developed countries extend the preferences under the
scheme to all developing countries in responding positively to the different development, financial
and trade needs of a particular group of developing countries.77
3. The pivotal role of the Enabling Clause as part of the GATT/WTO regime for
developing countries and as a self-standing regime
5.21 The Andean Community notes that the Enabling Clause was adopted during the Tokyo
Round.  The Enabling Clause replaced the 1971 waiver which permitted developed contracting parties
to accord, for ten years, preferential tariff treatment to products originating in developing countries.
By contrast, the duration of the Enabling Clause is not limited.
5.22 The Andean Community argues that the Enabling Clause is the centrepiece of the
GATT/WTO framework for special and differential treatment to developing countries.  The first effort
was the amendment in 1955 of Article XVIII of the GATT, providing developing countries with tools
to protect domestic industries.  The addition in 1965 of Part IV of the GATT also marked an
important step in the evolution of this framework.
5.23 According to the Andean Community, the GSP scheme was created under the auspices of the
United Nations Conference on Trade and Development (UNCTAD) to address the concerns  of
developing countries.  UNCTAD reached a final agreement to establish a "mutually acceptable systemof generalized, non-reciprocal and non-discriminatory preferences" in 1968.
78  Subsequent work in
both UNCTAD and the Organization of Economic Co-operation and Development (OECD) ensured
                                                     
74 Oral statement of Ecuador, p. 2.
75 Oral statement of Peru, paras. 5, 9 and 12.
76 Oral statement of Venezuela, pp. 1 and 2.
77 Oral statement of Venezuela, p. 2.
78 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 24, where in
footnote 15 it cites Resolution 21(II), 'Preferential or free entry of exports of manufactures andsemi-manufactures of developing countries to the developed countries', adopted at UNCTAD II, 1968, reprintedin H.D. Shourie,  UNCTAD II – A Step Forward , New Delhi (1968), 343-344.WT/DS246/R
Page 69
that developing countries and developed nations respectively agreed on the principles and the
particulars of the GSP.79
5.24 The Andean Community notes that in 1971, the CONTRACTING PARTIES of the GATT
adopted a waiver decision in order to 'enable' GSP regimes to coexist with the GATT rules.80  The
1971 Waiver Decision authorized the GSP schemes for a period of ten years.  This waiver wastransformed into a permanent regime by the 1979 Enabling Clause.  The Enabling Clause thus put in
place the cornerstone of the special and differential treatment for developing countries in the
GATT/WTO regime.  The GSP is the most concrete and relevant form of "special and differential"
treatment that developed countries offer the developing countries.  As such, GSP systems are key to
the participation of developing countries in the world trading system.
5.25 The Andean Community is of the view that the evolution of the framework for special and
differential treatment to developing countries is still an ongoing process.  Development has beenrecognized explicitly as a prime concern for the WTO system.  The preamble to the WTO Agreements
highlight its importance.  Ongoing negotiations are also dedicated to development issues
81, and have
been referred to as the "The Doha Development Round".  While it is impossible to envisage what the
"special and differential treatment" construction will be at the end of "The Doha Development
Round", there has been no suggestion that the Enabling Clause should be removed.82  The Enabling
Clause is indeed one of the very few elements that is generally accepted by both developing and
developed countries.  All recognize that the Enabling Clause and the existence of GSP schemes are
fundamental to the continued participation of developing countries in the WTO.
5.26 The Andean Community disagrees with India's argument that the Enabling Clause is merely
an exception to the MFN principle.  According to the Andean Community, the Enabling Clause is aself-standing regime, affirmatively establishing the manner in which developed countries are to assist
developing countries. Because the Enabling Clause is self-standing and has requirements and a
terminology of its own, the MFN principle is not part of the Enabling Clause. Without express
articulation, it cannot be taken for granted that the requirements and terms of the Enabling Clause are
subservient to other WTO principles. The Enabling Clause contains no language to that effect.
5.27 The Andean Community argues that accord ing to the ordinary meaning of the term
"notwithstanding" set out in paragraph 1 of the Enabling Clause, Article I:1 of GATT 1994 simply
does not apply when developed contracting parties grant preferences to developing countries.  The
Oxford dictionary defines "notwithstanding" as " without regard to or prevention by ".
83  In other
words, when preferential treatment falls under the Enabling Clause, Article I:1 of GATT 1994 does
not apply at all.
5.28 The Andean Community also contends that Article I:1 of GATT 1994 does not offer any
useful 'context' in interpreting the Enabling Clause  because there is no comparable language in the
Enabling Clause to that of Article I:1 of GATT 1994.  Particularly, the requirement of providing
"unconditional" MFN treatment to all other Members does not appear in the text of the Enabling
Clause.
                                                     
79 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 24, where in
footnote 16 it refers to statements made in: GATT, Minutes of meeting of the Council, C/M/69, 28 May 1971.
80 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 125, where in
footnote 17 it cites the Decision of the Contracting Parties of 25 June 1971 (BISD 18S/24).
81 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 30, where in
footnote 19 it cites the Doha WTO Ministerial 2001: Ministerial Declaration of 20 November 2001,WT/MIN(01)/DEC/1, at para. 2.
82 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 32, where in
footnote 21 it refers to the re-affirmation of the Enabling Clause in the Doha Implementation decision, § 12.2.
83 [emphasis original] Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela,
para. 37, where in footnote 24 it cites: The Concise Oxford Dictionary of Current English, 7th Edition.WT/DS246/R
Page 70
5.29 In its oral statement made at the first substantive meeting of the Panel, the Andean
Community argues that  the non-discrimination requirement in the Enabling Clause is different  from
the MFN principle.  Citing the 1978 Report on the Most Favored Nations Clause of the International
Law Commission, it concludes that the standards of non-discrimination generally permit distinction
on the basis of certain objective criteria.84
5.30 According to the Andean Community, the issue in this case is not the MFN principle, but the
requirements of the Enabling Clause itself.85
5.31 The Andean Community claims that the notion of non-discrimination in the Enabling Clause
is understood as a command not to treat equal situations differently or different situations equally,
whereas the MFN principle requires treating like products from all exporting countries in the same
way.  Under the Enabling Clause, providing different treatment to developing countries with different
economic position does not necessarily constitute discrimination.
5.32 The Andean Community further argues that the Enabling Clause is not a waiver from
Article I:1 of GATT 1994.  Unlike its predecessor – the 1971 Decision – the Enabling Clause is not
described on its face as a waiver.  Moreover, Article XXV of GATT 1994 refers to waivers of an
obligation "imposed on a  contracting party" [emphasis original] in "exceptional circumstances".  The
Enabling Clause does not refer to any exceptional ci rcumstances, nor is it temporary.  According to
the Andean Community, it goes without saying that it would be inappropriate to apply a narrow or
strict reading of exceptions or waivers that the Appellate Body promulgates when interpreting the
Enabling Clause.  The Enabling Clause is therefore a self-standing regime rather than an exception to
Article I:1 of GATT 1994.
4. "Other contracting parties" in paragraph 1
5.33 The Andean Community considers that the phrase  "other contracting parties" in paragraph 1
of the Enabling Clause refers to any other contracting parties, whether developed or developing
countries.  The text of the Enabling Clause is clear in that GSP donors are permitted to differentiate
between developing countries.  Paragraph 1 provides that the contracting parties may accord
differential and more favorable treatment to some developing countries without according suchtreatment to "other contracting parties".  The Enabling Clause allowed developing countries to offer
them to any other contracting parties, whether developed or developing.
5.34 The Andean Community argues that this reading is confirmed by the fact that the request to
add "developed" between "other" and "contracting parties" in paragraph 1 was not accepted in the
GATT Council meeting adopting the 1971 waiver Decision.
86
5. Paragraph 3(c) of the Enabling Clause
5.35 The Andean Community contends that  paragraph 3(c) allows and requires developed
countries to make distinctions between developing countries in their GSP schemes.  It requires
developed countries to "design" GSP schemes in such a way as to "facilitate and promote the trade of
developing countries" and to "respond positively" to the development, financial and trade needs of
developing countries.  The developing country membership of the WTO is vast, and it is beyond
doubt that not all developing countries have the same needs.  In "designing" their GSP regimes,developed country Members have a positive obligation to take this into account. The European
Communities' Drug Arrangements do exactly that.
                                                     
84 First oral statement on behalf of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 3.
85 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 41.
86 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 51, where in
footnote 31 it cites the GATT, Minutes of meeting of the Council, C/M/69, 28 May 1971.WT/DS246/R
Page 71
5.36 The Andean Community submits that the Eu ropean Communities' GSP regime properly
acknowledges drug-related problems. The Andean Community points out that the production and
trafficking of illicit drugs have far-reaching, unparalleled implications and compromise the economic
and social development of the affected countries in a unique way.  These unique development needs
have been recognized internationally.87  The kind of increased market access provided by the Drug
Arrangements has been internationally recognized as an effective tool to alleviate the special
development needs of countries affected by drug production and trafficking.  These unique problems
have been recognized within the WTO as well.  For instance, the preamble to the Agreement on
Agriculture  recognizes that increased market access is an effective response to drug-related
development problems.88
5.37 The Andean Community claims that additional pr eferences granted to these countries by the
European Communities is not only permissible, but also desirable under the Enabling Clause becausethey recognize the unique development needs and provide a response tailored to specific needs of
these countries.  The Drug Arrangements seek to displace or reduce the importance of drugs as an
economic activity in the affected countries.  Increased market access encourages the production of
alternative agricultural crops, as well as the allocation of resources to industrial goods.  Likewise, by
raising standards of living, the Drug Arrangements help strengthen civil institutions, which in turn,
further reduces the influence of the "drug economy" in these countries.
6. The interpretation of the te rm "non-discriminatory" in footnote 3 of the Enabling
Clause
5.38 For the Andean Community, it goes without saying that enabling discrimination was not the
intention of the Enabling Clause. The Andean Community contends that differentiating betweendeveloping countries – taking into account their different situations – does not constitute
discrimination.  In other words, different treatment of situations which are objectively different is not
discriminatory.  Contrarily, the Andean Community argues that discrimination can be found when
treating "like" situations differently and in treating different situations the same. To follow India's
theory of non-discrimination – making no distinction between different categories of developingcountries – would actually institute a discrimination which would undermine the Enabling Clause.
5.39 The Andean Community posits that in order to comply with the requirements of paragraph 3
of the Enabling Clause, preferences must be designed to facilitate and promote the trade of individual
or groups of developing countries and respond positively to their development needs. In other words,
the standard of non-discrimination generally permits distinctions on the basis of certain objective
criteria. Making no distinction between different categories of developing countries as India argues
would actually institute discrimination, thus undermining the Enabling Clause.
5.40 In its oral statement at the first substantive meeting of the Panel, the Andean Community
contends that paragraphs 3(a) and 3(c) inform the interpretation of the term "non-discriminatory".
Both these subparagraphs require that the design of GSP scheme be fashioned "to promote the trade of
developing countries" and "to respond positively to development, financial and trade needs of
developing countries".  These phrases can be seen to guide and limit the discretion of donor countrieswhen designing their respective GSP schemes.
89
                                                     
87 As mentioned above, by the General Assembly of the United Nations.  See also the 2002 a nnual
report of the International Narcotics Control Board mentioned above, which specifically noted the enormity of
the drug problem in South America.
88 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 63, where in
footnote 37 it refers to para. 112 of first written submission of the European Communities.
89 First oral statement of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 4.WT/DS246/R
Page 72
5.41 The Andean Community disagrees with Paraguay's argument that discrimination is only
envisaged for the benefit of the least-developed countries, as set out in paragraph 2(d) of the Enabling
Clause and that differentiation between developing countries is not permitted by the Enabling Clause.
The Andean Community argues that paragraph 2(d) refers to another field of application of the
Enabling Clause unrelated to GSP.  Paragraph 2(d) relates both to tariff and non-tariff measures,whereas paragraph  2(a) of the Enabling Clause only relates to preferential tariff treatment.
90
5.42 The Andean Community takes issue with Paraguay's suggestion that it is not necessary for a
donor like the European Communities to first establish objective criteria in the abstract – in this case,
related to drug problems – then establish a separate procedure or criteria pursuant to which it would
decide which developing countries would qualify for such preferences.91 The Andean Community
argues that nothing suggests that a donor like the European Communities could not conduct a
selection process and include the results of this process in its GSP regulation. What matters is that thechoice of beneficiary countries reflected in the regulation corresponds with the criteria of the Enabling
Clause, notably paragraphs 3(a) and 3(c). In other words, and contrary to Paraguay's assertion, the
question of whether the Enabling Clause permits the European Communities to differentiate between
developing countries on the basis of drug-related problems is appropriately before the Panel.
B. 
COSTA RICA
1. Introduction
5.43 Costa Rica submits that the European Communities' Drug Arrangements are fully consistent
with the provisions of the Enabling Clause.  C onsequently, Costa Rica further submits that the Drug
Arrangements are in conformity with the WTO Agreement, including the MFN principle set out in
Article I:1 of GATT 1994.92
5.44 Costa Rica notes that one of several forms of preferential treatment authorized by the
Enabling Clause is preferential tariff treatment granted by developed countries to products originating
from developing countries pursuant to paragraph 2(a) and footnote 3 of the Enabling Clause.  Costa
Rica maintains that the Decision of the Contracting Parties of 25 June 1971, mentioned in footnote 3
of the Enabling Clause, exempted developed countries from Article I:1 of GATT 1947 to the extentnecessary to accord generalized, non-reciprocal, non-di scriminatory and beneficial preferential tariff
treatment.
93
5.45 Costa Rica submits that the Enabling Clause does not prohibit a developed country from
granting preferential tariff treatment to some, but not all, developing countries.  The European
Communities fulfils its obligation under the Enabling Clause by designing its preferential tariff
scheme in a way that responds to the different development and trade needs of beneficiary countries.
The European Communities' Drug Arrangements comp ly with terms of the Enabling Clause because
eligibility is determined based on objective and non-discriminatory criteria.  Furthermore, Costa Rica
argues that duty-free market access granted under these arrangements is necessary to respond to the
different development needs of those countries whose economic, trade and financial development is
hindered by drug production and/or trafficking.94
                                                     
90 First oral statement of Bolivia, Colombia, Ecuador, Peru and Venezuela, paras. 8-9.
91 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 6, where in
footnote 2, it cites paragraph 9 of Paraguay's third party submission.
92 Third-party submission of Costa Rica, para. 1.
93 Third-party submission of Costa Rica, para. 13.
94 Third-party submission of Costa Rica, paras. 1 and 2.WT/DS246/R
Page 73
2. The important implications of this dispute for Costa Rica
5.46 Costa Rica emphasizes that it has a substantial interest in the outcome of this dispute since it
is a beneficiary developing country under the European Communities' Drug Arrangements.95 Costa
Rica reiterates its request for additional third-party rights in this dispute and submits that panels in the
past have granted enhanced third-party rights on the basis of, inter alia , the economic effect that the
measures in dispute can have on third parties.96 Accordingly, Costa Rica states that the extent of the
dire economic and social consequences that coul d result from the modification of the European
Communities' Drug Arrangements, especially in the absence of substantial tariff reduction or
elimination on an MFN basis by developed countries, justify the granting of additional third-party
rights to Costa Rica.97
5.47 Costa Rica points out that agricultural products that are included in the European
Communities' special tariff arrangements comprise 30 per cent of its agricultural sector and CostaRican exports to the European Communities in 2001 exceeded US$169 million (20 per cent of total
exports to the European Communities) under the Drug Arrangements.
98
3. The Enabling Clause does not prohibit the gr anting of preferential tariff treatment to
some developing countries
5.48 According to Costa Rica, India's argument that developed countries are required to extend any
advantage accorded under GSP schemes to all developing countries is based on a flawed
interpretation of paragraph 1 of the Enabling Clause, since there is nothing in the Enabling Clause
requiring that preferential treatment must be accorded to all developing countries or none.99 India's
claim that the Enabling Clause excuses donor countries from according MFN treatment to other
developed countries, but not to developing countries is mistaken.100  Costa Rica further dismisses
India's interpretation that the words "other contrac ting parties" in paragraph 1 of the Enabling Clause
means only developed countries.
5.49 In countering India's argument , Costa Rica argues that unlike Article I:1 of GATT 1994,
which specifies that the advantage, favour, privile ge, or immunity shall be accorded to the like
products of " all other contracting parties", paragraph 1 of the Enabling Clause does not specify the
number or category of contracting parties to which the donor country must accord preferential
treatment.  Costa Rica maintains that the drafters of the Enabling Clause would have simply added the
word "developed" before "contracting party" if they had intended that developed countries extend
preferential treatment to developing countries as a whole.101
5.50 Costa Rica posits that India's argument that tariff preferences must be granted to all
developing countries lacks legal basis and is contrary to the object and purpose of the Enabling
Clause.  In this regard, Costa Rica notes that the Enabling Clause is a fundamental part of the rightsand obligations of WTO members, which allows developed countries the right to grant preferential
treatment to the developing countries.  The Enabling Clause clarifies the scope of Article I:1 of GATT
1994 and as such, it does not require developed countries to grant preferential treatment to the "other
contracting parties".  According to Costa Rica, this means that those countries not benefiting from
preferential treatment have no right to demand such treatment be granted to them on the basis ofArticle I:1 of GATT 1994.
102 Costa Rica points out that the phrase "[n]otwithstanding the provisions
                                                     
95 Third-party submission of Costa Rica, para. 9.
96 Third-party submission of Costa Rica, paras. 7 and 11.
97 Third-party submission of Costa Rica, para. 9.
98 Third-party submission of Costa Rica, para. 9.
99 Third-party submission of Costa Rica, para. 16;  Oral statement of Costa Rica, paras. 6 and 9.
100 Oral statement of Costa Rica, para. 3.
101 Third-party submission of Costa Rica, para. 18.
102 Oral statement of Costa Rica, para. 4.WT/DS246/R
Page 74
of Article I of the General Agreement" in paragraph 1 of the Enabling Clause, clearly indicates that
Article I:1 of GATT 1994 does not apply to preferential treatment accorded to developing countries
under the terms of the Enabling Clause.103
5.51 Costa Rica states that India adopts an unjustifiably rigid interpretation of "developing
countries" in paragraph 1 of the Enabling Clause.  If the words "developing countries" require that thewhole class of developing countries be included, then  it would follow that in paragraph 2(a), where it
states that paragraph 1 applies to "products originat ing in developing countries", it also refers to this
whole class.  According to Costa Rica, this wo uld lead to an absurd interpretation insofar as
developed countries would be able to grant preferential treatment only to products that originate in
all developing countries without exception.
104
5.52 According to Costa Rica, the issue of whether the GSP requires donor countries to accord the
same preferential treatment to all developing countries was extensively discussed in 1971.105 Costa
Rica argues that the negotiating history of the Decision of the Contracting Parties of 25 June 1971106
confirms that the Contracting Parties purposefully agreed to leave open the possibility of allowingdeveloped contracting parties to accord preferential treatment to some, but not all countries.  In this
regard, Costa Rica refers to a failed amendment to the Decision of 1971, which proposed to add the
word "developed" to paragraph (a) of the Decision of 1971.  The proposal would have permitteddeveloped contracting parties to accord preferen tial treatment to developing countries, "without
according such treatment to the products of other developed  contracting parties."
107 Costa Rica
construes the rejection of this proposal – limiting the category of contracting parties that can be
deprived of preferential treatment – as a clear indication that the final text agreed upon allows donor
countries to exclude both developed and developing countries.108 Costa Rica maintains, had the
amendment been adopted, it would have meant that developed countries were still subject to the MFN
obligation under Article I:1 of GATT 1994 and consequently would be obliged to grant MFN
treatment to developing countries even under the GSP.109
5.53 In light of the negotiating history of the Deci sion of 1971, Costa Rica claims that India and
other countries surely knew that the GSP would allo w donor countries to grant preferential treatment
to certain  developing countries without needing to satisfy Article I:1 of GATT 1994 with respect to
other developing  countries.110
4. The Enabling Clause requires donor countries to differentiate between developing
countries
5.54 Costa Rica contends that the word "shall" in paragraph 3(c) of the Enabling Clause requires
affirmative action on the part of donor countries.  As such, it is not merely a best endeavours clause
                                                     
103 Oral statement of Costa Rica, para. 5.
104 Third-party submission of Costa Rica, para. 19
105 Oral statement of Costa Rica, para. 9.
106 Third-party submission of Costa Rica, para. 20, where in footnote 15 Costa Rica states: "The
Decision of 1971 still possesses legal author ity, albeit limited.  It is incorpor ated, by direct reference, into the
Enabling Clause.  It defines and sets the parameters of the GSP pursuant to which the developed countries maygrant preferential tariff treatment to developing countries notwithstanding the provisions of Article I of GATT."
107 [emphasis original] See third-party submission of Costa Rica, para. 20, where in footnote 16 Costa
Rica cites: Council of the GATT, Minutes of Meeting held in the Palais des Nations, Geneva, on 25 May 1971,
C/M/69, 28 May 1971 (Exhibit CR –1).
108 Third-party submission of Costa Rica, para. 20.
109 Oral statement of Costa Rica, para. 14.
110 Oral statement of Costa Rica, para. 17.WT/DS246/R
Page 75
that asks developed countries to take into account the different conditions prevailing in individual
developing countries.111
5.55 According to Costa Rica, paragraph 3(c) of the Enabling Clause imposes on donor countries
the obligation to design and, if necessary, modify the differential and more favourable treatment
accorded, "to respond positively to the development, financial and trade needs of the developingcountries."
112 Costa Rica argues that paragraph 3(c) of the Enabling Clause constitutes irrefutable
evidence that paragraphs 1 and 2(a) should not be interpreted as prohibiting donor countries from
differentiating between developing countries when according preferential tariff treatment on the basis
of objective criteria that recognizes and take into account the particular economic realities of potential
beneficiary countries.113
5.56 Costa Rica argues that paragraphs 3(c) and 7 illustrate how India's interpretation of
paragraphs 1 and 2(a) is inconsistent with the object and purpose of the Enabling Clause.114 Like
paragraph 3(c), paragraph 7 of the Enabling Clause recognizes that the economic development of the
less-developed contracting parties will proceed at a different pace, and as their economic situation
improve, so too will their participation in the multilateral trading system.115 In dismissing India's
premise that the Enabling Clause requires donor countries to accord identical treatment to all
developing countries irrespective of the latters' particular level of development, Costa Rica questionshow a donor country could comply with its obligation under paragraph 3(c) if it is prohibited from
providing additional market access to those developi ng countries whose particular economic situation
demand such preferential treatment.
116
5.57 Costa Rica further alleges that India's inflexible and flawed interpretation of paragraph 3(c) of
the Enabling Clause would result in pernicious practical consequences for developing countries.Accordingly, requiring developed countries to accord preferential treatment either to all developing
countries or to none would discourage donors from extending preferential market access to the
developing countries which require it the most.  Consequently, these consequences would frustrate
a priori  the object and purpose of the Enabling Clause.
117
5.58 According to Costa Rica, the European Communities' Drug Arrangements are without a doubt
consistent with paragraph 3(c) of the Enabling Clause, as they allow farmers the opportunity to
substitute illicit crops with duty-free eligible products, as well as providing the necessary resources
and incentives to those countries faced with the problem of combatting drug trafficking.118
5. The Drug Arrangements provided by the European Communities are non-
discriminatory
5.59 Costa Rica argues that the Enabling Clause also requires that the selection of eligible
beneficiaries be based on objective, non-discriminatory criteria in accordance with the GSP, asdescribed in the decision of 1971.  Costa Rica is of the view that the European Communities' Drug
Arrangements are based on this criteria and therefore are non-discriminatory.
119
                                                     
111 Third-party submission of Costa Rica, para. 22.
112 Oral statement of Costa Rica, para. 20.
113 Third-party submission of Costa Rica, para. 21.
114 Third-party submission of Costa Rica, para. 25.
115 Third-party submission of Costa Rica, para. 24.
116 Third-party submission of Costa Rica, para. 25.
117 Third-party submission of Costa Rica, para. 26.
118 Third-party submission of Costa Rica, para. 23.
119 Third-party submission of Costa Rica, para. 27.WT/DS246/R
Page 76
5.60 Costa Rica agrees with the European Communities that the principle of non-discrimination
must not be equated to the MFN principle set out in Article I:1 of GATT 1994.120  Costa Rica notes
that the European Communities interprets the te rm "non-discrimination" set out in footnote 3 of
paragraph 2(a) of the Enabling Clause, as allowing donor countries to treat developing countries
differently according to their developing needs based on objective criteria.121
5.61 Costa Rica reasserts that the evidence tendered by the European Communities demonstrates
that duty-free access granted to the 12 beneficiaries under the Drug Arrangements is a necessary
response to the different development needs of th ose developing countries whose economic, trade and
financial development is hindered by drug production and/or trafficking.122
6. Paragraph 3(b) of the Enabling Clause precludes preferential treatment from
constituting an impediment to the reduction or elimination of tariffs and other
restrictions to trade on an MFN basis
5.62 Costa Rica urges the Panel to take notice of the fundamental obligation set out in
paragraph 3(b) of the Enabling Clause.  This obligation not to design or use preferential arrangements
under the GSP as an impediment to multilateral tr ade liberalization formed part of the original
decision creating the GSP.123 Costa Rica states the purpose of allowing developed countries to grant
preferential tariff treatment by virtue of the Enabling Clause is simply to accelerate the process oftariff elimination and the integration of developing countries in the multilateral trading system, as
reflected by UNCTAD Resolution 21 (II).  Therefore, preferential tariff treatment should not
substitute or undermine the objective of tariff elimination on an MFN basis.
124
C. THE CENTRAL AMERICAN COUNTRIES OF EL SALVADOR , G UATEMALA , HONDURAS AND
NICARAGUA
1. Introduction
5.63 The Central American countries of El Salv ador, Guatemala, Honduras and Nicaragua,
participating as third parties in this dispute present a joint third-party written submission and a joint
oral statement to the Panel.
5.64 The Central American countries stress that their countries have suffered greatly from drug
trafficking.  The efforts and costs associated with combatting this problem jeopardize their
development agenda.125 The Central American countries submit that in accordance with the principle
of shared responsibility, the European Communities is doing its part to eradicate the international
problem of drugs through its Drug Arrangements.  In  light of their geographical location as a hub for
drug trafficking, their designation as beneficiaries under the Drug Arrangements is objectively
warranted.  The Central American countries claim that the Enabling Clause does not annul the
principle contained in Article I:1 of GATT 1994; simply it does not apply in this particular casebecause the Drug Arrangements are covered by the Enabling Clause.  The Central American countries
assert that the Drug Arrangements are a positive response to their development needs.
126
                                                     
120 Oral statement of Costa Rica, para. 20.
121 Third-party submission of Costa Rica, para. 28, where in footnotes 19, 20 and 21, Costa Rica refers
to and cites paras. 28, 61 and 75 respectively of the First written submission of the European Communities.
122 Oral statement of Costa Rica, para. 29.
123 Third-party submission of Costa Rica, paras. 30-31, where Costa Rica refers to the "Agreed
Conclusions of the Special Committee on Preferences", UNCTAD, Document TD/B/330, p. 7 at para. 2 (ii) (b)
of Part IX  (Exhibit CR-2).
124 Third-party submission of Costa Rica, para. 32.
125 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 2.
126 Joint oral statement of El Salvador, Guatemala, Honduras and Nicaragua, p. 1.WT/DS246/R
Page 77
2. The designation of the beneficiaries of the Drug Arrangements and the assessment of the
gravity of the drug problem in Central America
5.65 The Central American countries state that Central America is a major transit route for drug
traffickers transporting drugs from South America to the markets of North America.127 Accordingly,
due to their geographical position, geomorphologic features and socio-economic and culturalsituation, the Central American countries have been a  target of international drug activities.  The
Central American countries emphasize that drug trafficking is a very deep-rooted problem and leads
to instability, mainly in the areas of security, the economy and health..
128
5.66 The Central American countries emphasize that the by-products that emerge from drug
production and trafficking have afflicted their countries and have also hampered the development of
the region.  Accordingly, the region has experienced a significant increase in firearms trade along the
trafficking routes, as well as other related crimes such as; trade in persons, stolen vehicles, moneylaundering and organized gangs.  The substantial amount of resources allocated by the Central
American countries to combat drug trafficking have been diverted away from vital development needs
such as health and education.
129 In this regard, the Central American countries point out that their
respective poverty and illiteracy rates are alarming.130
5.67 The Central American countries argue that the determination of which developing countries
are eligible under the European Communities' Drug Arrangements is based on objective criteria.  The
designation as a beneficiary also includes an asse ssment of the seriousness of the drug problem in
each developing country and what efforts are made to combat against the problem.131 The conditions
of those countries with drug production and trafficking problems differ from other countries not
afflicted with such problems.  Consequently, in light of the human, economic and social cost of drugtrafficking in their countries, the Central American countries submit that they are eligible to benefit
from the Drug Arrangements.
132
3. The Enabling Clause is applicab le to the Drug Arrangements
5.68 The Central American countries argue that consistent with the objective of the Enabling
Clause of granting special and more favourable treatment, the Drug Arrangements have given
                                                     
127 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 8 and
para. 9, where an excerpt of the 2001 Report of the International Narcotics Control Board is cited stating that
almost 50 per cent of cocaine arriving into the Unites States annually transits through Central America and
Mexico.
128 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 10.
129 Joint third-party submission of El Salvador, Guatemala, Honduras and  Nicaragua, paras. 11-15.
130 Joint third-party submission of El Salvador, Guatemala, Honduras and  Nicaragua, para. 16, where
in footnote 4 the following poverty and illiteracy figures are provided for each of the four countries: InEl Salvador, 39 per cent of the population lives in poverty and 16 per centin extreme poverty.  As regardseducation, the illiteracy rate for those aged over 15 years is 15 per cent (2001 data).  In Guatemala, 79.9 per centof the population and 75.5 per cent of households live in conditions of poverty;  59.3 per cent of them inconditions of extreme poverty.  As regards education, the rate of illiteracy among the population aged over 15 is
32.7 per cent.  In Honduras, 64 per cent of households live in poverty.  Regarding education, in 2001, the rate of
illiteracy among the population aged over  15 years was 20 per cent.  In Nicaragua, 75 per cent of the population
lives in conditions of poverty, according to the index of unsatisfied basic needs.  Almost one third (31.2 percent) lives in some degree of poverty, while the remaining households live in extreme poverty (43.6 per cent)because they lack from two to four basic needs.  Only one quarter of households (25 per cent) are not in thepoverty category.  Sixty per cent of the population is in urban areas and 40 per cent in rural areas, but 75 per
cent of poor people are in rural areas.  As regards education, the urban rate of school attendance is 79, whereas
in rural areas it is 69 per cent.
131 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 6.
132 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 7.WT/DS246/R
Page 78
developing countries an opportunity to expand and diversify exports and to eradicate the drug
problem.133
5.69 The Central American countries note that the Enabling Clause authorizes special and more
favourable treatment, "[n]otwithstanding the provisions of Article I".134 Therefore, since the Drug
Arrangements are covered by the Enabling Clause, Article I:1 of GATT 1994 finds no application inthis dispute.
135
4. The Drug Arrangements are a positive response to the needs of developing countries
5.70 The Central American countries argue that paragraph 3(c) of the Enabling Clause suggests
that special and differential treatment should be granted on a proactive basis, taking into account
changes in the levels of development and the development, financial and trade needs of developing
countries.  Accordingly, the Drug Arrangements constitute a positive way of implementing special
and differential treatment in accordance with the specific needs of developing countries.  The DrugArrangements have been designed to meet the special needs of countries whose performance and
development has been jeopardized by drug problems.
136
5.71 The Central American countries claim that the Drug Arrangements are a positive response to
the needs of their countries pursuant to paragraph 3(c) of the Enabling Clause.  The Central American
countries assert that the Drug Arrangements have fostered the creation of alternative developmentprogrammes as well as the creation of licit jobs, this is testimony of the benefits accruing from the
Drug Arrangements.  Additionally, the Central Amer ican countries have witnessed a notable increase
in exports of non-traditional products to the European Community as a result of the Drug
Arrangements.  Moreover, the market opportunities under the Drug Arrangements has helped to offset
losses sustained as a result of the fall in prices of traditional exports.  The Central American countriesalso emphasize how the spin-offs from the Drug Arrangements have led to economic benefits and
better services for farmers and enterprises, which complement the efforts of their respective
governments in these areas.  Lastly, the Central American countries claim that the fiscal revenue
gained as a result of the increase in production makes it possible to strengthen development
programmes and government institutions.
137  The Central American countries therefore consider that
the social and economic benefits derived from the Drug Arrangements should be taken into account
by the Panel.138
D. MAURITIUS
1. Introduction
5.72 Mauritius submits that the Panel should find no inconsistency with the European
Communities' administration of its GPS scheme to the extent that it is consistent with the Enabling
Clause, which Mauritius believes provides for differential treatment to developing countries based ontheir development, financial and trade needs.
139 Mauritius is of the view that India bears the burden of
proof in light of WTO jurisprudence on this issue.  Also, the Drug Arrangements are consistent with
the provisions of the Enabling Clause, as they provide for non-discriminatory treatment to products
originating from developing countries where the same conditions prevail.  Alternatively, the Drug
Arrangements are justified under Article XX(b) of GATT 1994.
                                                     
133 Joint third-party submission of El Salvador, Guatemala, Honduras and  Nicaragua, para. 21.
134 Joint oral statement of El Salvador, Gu atemala, Honduras and  Nicaragua, p. 2.
135 Joint third-party submission of El Salvador, Guatemala, Honduras and  Nicaragua, para. 22.
136 Joint third-party submission of El Salvador, Guatemala, Honduras  and Nicaragua, paras. 23-27.
137 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, paras. 28.
138 Joint oral statement of El Salvador, Guatemala, Honduras and Nicaragua, p. 2.
139 Third-party submission of Mauritius, p. 1.WT/DS246/R
Page 79
2. India bears the burden of proof
5.73 Mauritius argues that the complainant party bears the burden of proving that the respondent
has acted inconsistently in light of the Appellate Body's ruling in US – Wool Shirts and Blouses .
Mauritius also cites the Appellate Body's ruling in EC – Hormones  as further support that there should
be no presumption that a WTO Member has acted inconsistently with the covered agreements.140
5.74 Mauritius claims that even if one assumes that the Enabling Clause is an exception to
Article I:1 of GATT 1994, the maxim " quinque exceptio invokat, ejusdem probare debet " (i.e.  the
burden of proof stays with the party invoking the exception) would not apply because what is at issue
is not the Enabling Clause per se , but rather the conditions under which access to the Drug
Arrangements is regulated.  Accordingly, since India is claiming that the European Communities'
Drug Arrangements violate the obligation of non-discrimination set out in the Enabling Clause by not
extending such preferential treatment to all developing countries, India bears the burden of proof.  Inlight of the EC – Hormones  case, there is no reason to presume that the European Communities has
not respected the obligation of non-discrimination.
141
3. The Drug Arrangements are non-discriminatory
5.75 Mauritius submits that India's interpretation that paragraph 2(a) of the Enabling Clause
precludes the European Communities from distinguishing between products originating from thebeneficiaries of the Drug Arrangements and products originating from other developing countries is
incorrect.  From the onset of the analysis of "non-discriminatory", Mauritius notes that the
GATT/WTO case law has not had the opportunity until now to rule on the interpretation of
paragraph 2(a) of the Enabling Clause and asserts that the Panel will have to address whether India's
interpretation is supported by a proper reading of the Vienna Convention on the Law of Treaties.
142
5.76 Mauritius argues that paragraph 1 and footnote 3 of the Enabling Clause clearly indicate that
the obligation of "non-discrimination" differs from  the MFN obligation in Article I:1 of GATT 1994.
Mauritius highlights that the terms "automatically" and "unconditionally" in Article I:1 of GATT
1994 are not found in the Enabling Clause and that only a footnote refers to "non-discriminatory".
Mauritius is of the view that differentiation between countries does not automatically imply
"discrimination" as long as such differentiation is based on objective and reasonable grounds.
According to Mauritius, the concept of "discriminati on" is elaborated in the chapeau of Article XX of
GATT 1994, where it is unambiguously stated that discrimination is unjustifiable if it does not
account for differences among countries.  The chapeau calls for non-discrimination between products
originating in countries "where the same conditions  prevail".  Mauritius claims that the foregoing
should provide useful guidance when interpreting the principle of non-discrimination.  Thus,
Mauritius submits that the Drug Arrangements are consistent with the provisions of the EnablingClause as they provide for non-discriminatory treatment to products originating from developing
countries where the same conditions prevail.
143
5.77 Mauritius argues that the Drug Arrangements grant more preferential treatment to some
developing countries that are willing to make an extra effort and take positive measures to combat the
serious drug problem the world is currently facing.  Mauritius submits that the Enabling Clause allowsdonor countries to grant more preferential treatment to some developing countries.  Firstly, the text of
the Enabling Clause explicitly permits distinc tions to be drawn between developing and least-
developing countries.  Secondly, since paragraph 3(c) clearly allows modifying a GSP scheme in
order to "respond positively to the development, financial, and trade needs of developing countries", it
                                                     
140 Third-party submission of Mauritius, p. 1.
141 Third-party submission of Mauritius, pp. 1-2.
142 Third-party submission of Mauritius, p. 3.
143 Third-party submission of Mauritius, pp. 4-5.WT/DS246/R
Page 80
follows that these needs are not the same for a heterogeneous group such as the developing countries.
Thirdly, further support is found in paragraph 3(a) of the Enabling Clause.144
4. The Drug Arrangements  are justified through recourse to Article XX(b) of GATT 1994
5.78 Mauritius submits that even if the Panel disagrees with the foregoing and reaches the opposite
conclusion, the Drug Arrangements in any event are justified under Article XX(b) of GATT 1994because they are a necessary means to help human health.
145
E. PAKISTAN
1. Introduction
5.79 Pakistan states that it fully endorses the arguments advanced by the European Communities.
In this regard, Pakistan disagrees with the following three points raised by India:  (1) the Enabling
Clause does not permit developed countries to discriminate between developing countries;  (2) the
Drug Arrangements required a waiver;  and (3) Pakistan's inclusion in the Drug Arrangements isdesigned to respond to the policy objectives of th e European Communities rather than the needs of the
developing countries.
2. Article I:1 of the GATT 1994 does not apply to the Enabling Clause
5.80 Pakistan argues that  Article I:1 of GATT 1994 is inapplicable to the Enabling Clause in light
of the wording of paragraph 1 of the Enabling Clause.  Pakistan contends that the Enabling Clausedoes not require that the same preferential treatment be granted to all developing countries since the
entire GSP scheme is based on the granting of preferential treatment to different developing countries,taking into account their development needs.  Acco rdingly, the Enabling Clause enables special and
differential treatment of developing countries.  Therefore, if preferential treatment is covered by any
subparagraph of paragraph 2, then Article I:1 of GATT 1994 does not apply.146
3. The Drug Arrangements do not require a waiver
5.81 Pakistan rejects India's claim that the Drug Arrangements are not justified without a waiver.
Pakistan argues that unlike Article XXV of GATT 1994 and Article IX of the WTO Agreement,
which  refer to waivers of obligations imposed on a Member in exceptional circumstances, the
Enabling Clause does not mention exceptional circumstances nor is it temporary.  Therefore, Pakistan
submits that there is no need for the European Communities to obtain a waiver for its Drug
Arrangements.147
4. The inclusion of Pakistan in the Drug Arrangements is not to further the policy
objectives of the European Communities
5.82 Pakistan contends that India's claim that the circumstances in which Pakistan was included in
the Drug Arrangements indicates that the Drug Arrangements are designed to respond to the policy
objectives of the European Communities is not borne out by the facts.  Pakistan argues that like theother beneficiaries of the Drug Arrangements, Pakistan is also particularly affected by drug
trafficking, as it lies on a popular route for drug smuggling.  With the increase of poppy cultivation in
Afghanistan, Pakistan faces a continuous drug trafficking problem.  According to Pakistan, in 2002, it
                                                     
144 Third-party submission of Mauritius, pp. 5-6.
145 Third-party submission of Mauritius, p. 6.
146 [emphasis original] Oral statement of Pakistan, para. 2.
147 [emphasis original] Oral statement of Pakistan, para. 3.WT/DS246/R
Page 81
seized a total of 9.5 tons of heroin – the largest annual seizure of heroin by any country in the
world.148
5.83 According to Pakistan, the European Comm unities recognized at the time it included
Pakistan, that the instability in Afghanistan invariab ly led to greater drug trafficking through Pakistan.
Most of the poppy cultivation in Afghanistan is located in areas contiguous to the tribal belt ofPakistan.  In this area of the country, Pakistan point out that poppy had been eliminated through
sustained efforts.  However, Pakistan states that  without strong measures, poppy cultivation in the
tribal belt may re-emerge.  Pakistan asserts that its efforts to address drug production and trafficking
have been acknowledged by the UNDCP, declaring Pakistan poppy-free and a role model in the
region.
149
5.84 Pakistan claims that the increase of exports is worth approximately US$300 million as a result
of the Drug Arrangements, and has led to the creation of 60,000 job opportunities.  Consequently, avast majority of those possibly tempted by drug trafficking have been provided with alternative
sources of income.  In light of the foregoing, Pakistan submits its inclusion in the Drug Arrangements
was not designed exclusively to respond to the policy objectives of the European Communities.
150
F. PANAMA
1. Introduction
5.85 Panama asserts that it is necessary to maintain  the preferential tariff treatment granted under
the Drug Arrangements because it is a crucial in strument of support in the current struggle it is
waging to combat drug trafficking.151
5.86 Panama disagrees with India's claim that pa ragraph 1 of the Enabling Clause requires
developed countries to grant preferential treatment to all developing countries in conformity with
Article I:1 of GATT 1994.  Moreover, Panama argues  that the Enabling Clause allows preferential
treatment to be granted to developing countries on a selective basis, despite the MFN obligation.
2. The important implications of this dispute for Panama
5.87 Panama states that the following features of the country make it conducive for the trafficking
of drugs:  (1) geographical position;  (2) inter-ocean canal;  (3) international financial centre;(4) airport infrastructure;  (5) maritime efficiency;  (6) free circulation of the dollar as legal tender;
and (7) the largest free-trade zone in the hemisphere.
152
5.88 Panama points out that its authorities have made notable efforts in curbing drug trafficking.
Accordingly, there has been a noteworthy increase in seizures of heroin in recent years.  Panama
points out that in 2001 the highest drug seizures were for cocaine followed by those for heroin and
crack.153
5.89 Panama states that between 2000 and 2003 the primary destinations for these drugs were
Spain (39 per cent), Mexico (34 per cent) and the United States (21 per cent).154
                                                     
148 Oral statement of Pakistan, para. 4.
149 Oral statement of Pakistan, paras. 4-5.
150 Oral statement of Pakistan, paras. 6-8.
151 First oral statement of Panama, p. 3.
152 Third-party submission of Panama, p. 7.
153 Third-party submission of Panama, p. 7, where Panama provides the following data: Seizures in
2001 of cocaine, heroin, and crack were 2,655,984.49, 87,231.32 and 4 434.55 grams respectively.
154 Third-party submission of Panama, p. 7WT/DS246/R
Page 82
5.90 Panama is of the view that the Drug Arrangements send a strong message from the developed
countries to Panama and the region that it is possible to emerge from poverty by undertaking modest,
yet lawful activities.155
5.91 Panama states that in 2001 Panamanian exports to the European Community totalled
US$162.9 million.  Approximately 20 per cent of Panama's exports are directed to the EuropeanCommunity.  Panama asserts that the tariff preferences under the GSP promote Panamanian exports to
the European Community and have a direct impact on development in Panama.
156 Consequently, the
Drug Arrangements also diminish the degree of interdependence between Panama and the United
States;  Panama's traditional trading partner and accounting for more than 50 per cent of its exports.157
3. The Enabling Clause is drafted as a statute separate and distinct from the provisions of
Article I:1 of GATT 1994
5.92 Panama argues that the Enabling Clause is special legislation governing the general
legislation of the GATT 1994 with respect to differential and more favourable treatment of
developing countries in accordance with the arrangements outlined in paragraph 2.  Panama
emphasizes that paragraph 1 begins by pointing out that the rules of Article I:1 of GATT 1994 have
no bearing on the granting of differential and more favourable treatment to developing countries.158
5.93 Panama argues that paragraph 2 clearly identifies which schemes of preferences will be
excluded from the provisions of Article I:1 of GAT T 1994.  Also, Panama contends that footnote 2
clearly establishes the right of Members to reserve their position in cases not covered by the Enabling
Clause.  According to Panama, India's interpretation seeks to confuse the cases explicitly cited in the
Enabling clause with other schemes to which Article I:1 of GATT 1994 is applicable.159
5.94 Panama contends that paragraph 3 unambiguously states that the granting of "differential and
more favourable treatment" is consistent with the Enabling Clause and proceeds to give an exhaustive
list of requirements governing such treatment.  Consequently, the fact of stating that preferential
treatment shall be granted under the Clause [ sic] itself and listing the relevant requirements clearly
removes  such treatment set out in paragraph 2 of the Enabling Clause from the scope of Article I:1 of
GATT 1994.160
5.95 Panama submits that to disavow the status of the Enabling Clause as a separate and distinct
statute is to disregard its special character by subsuming it within the very same provision from which
it was excluded.161
4. The Drug Arrangements are not in contravention of Article I:1 of GATT 1994, and
paragraph 2(a) of the Enabling Clause
5.96 Panama argues that the Enabling Clause allows preferential treatment to be granted to
developing countries on a selective basis, desp ite Article I:1 of GATT 1994.  Panama dismisses
India's argument that the principle of unconditi onal MFN treatment found in Article I:1 of the GATT
1994 applies equally to the GSP schemes under the Enabling Clause.  According to Panama, the MFN
principle has been made subject to the special mechanism of the Enabling Clause.162
                                                     
155 First oral statement of Panama, p. 3.
156 Third-party submission of Panama, p. 6.
157 First oral statement of Panama, p. 3.
158 Third-party submission of Panama, p. 3.
159 Third-party submission of Panama, p. 3.
160 Third-party submission of Panama, p. 3.
161 First oral statement of Panama, p. 2.
162 Third-party submission of Panama, p. 3.WT/DS246/R
Page 83
5.97 Panama contends that the discrimination alleged by India is based on an erroneous approach.
The unilateral nature of the GSP allows donors the possibility of applying objective criteria in
selecting the beneficiaries of preferential treatment.  Panama states the criteria are determined on the
basis of an overall assessment of the seriousness of the drug problem in each developing country.  The
selection of beneficiaries pursuant to paragraph 2(a) of the Enabling Clause should be interpreted asthe exercise of the right of donor countries to grant preferential tariff treatment in the specific case,
rather than being discriminatory.  Panama contends that for India to claim that special and more
favourable treatment covered by paragraph 1 should be accorded to all developing countries is to add
an interpretative qualification not found in the text of the Enabling Clause.
163
5. The Enabling Clause authorizes differen tiation between beneficiaries without
establishing discrimination
5.98 Panama disagrees with India's argument that the Drug Arrangements discriminate between
developing countries because they do not extend to all developing countries.  According to Panama,
this flawed interpretation is based on the extension of Article I:1 of GATT 1994 to the Enabling
Clause and would result in legal uncertainty and frustrate the offering of positive incentives.  It would
also undermine the purposes for which the Enabling Clause was established.  Panama further contends
that India's interpretation of extending preferences to all as opposed to the principle of generalization(to a number of beneficiaries) embodied in the Enabling Clause, would cause donor countries to
considerably limit the scope of their GSP schemes in terms of  the number of programmes as well as
the coverage of benefits.
164
5.99 Panama further argues that it is unable to agree with India's interpretation in light of
paragraph 3(c) of the Enabling Clause.  According to Panama, the provisions of paragraph 3(c) cannever be complied with if India's interpretation that any differential benefit automatically constitutes
discrimination is accepted.  The needs of developing countries vary considerably from one region to
another or even between countries of the same region.  Panama claims that if paragraph 3(c) did not
provide flexibility in designing incentive schemes, we would face inflexible schemes which might not
be advantageous to those developing countries that derive no benefits from more generic schemes.Moreover, there would be no way of preventing more advanced developing countries from receiving
benefits to the detriment of schemes designed for those developing countries whose size, capacities
and infrastructure are infinitely less advanced.  Therefore, Panama submits that paragraph 3(c) of the
Enabling Clause provides for the possibility of designing different schemes of preferences and
modifying them in accordance with the developments observed.
165
6. The Drug Arrangements are a positive response to the development needs of Panama
and are supported by paragraph 3(c) of the Enabling Clause
5.100  Panama states that a major obstacle in accelerating economic growth and development of
developing countries is the inability to compete on equal terms with the markets of developed
countries.  This impediment is compounded when a country must devote significant manpower and
financial resources to combat drug trafficking and its many related nefarious by-products.166
5.101  Following an exhaustive analysis of the Drug Arrangements, it is Panama's position that they
do not violate Article I:1 of GATT 1994 since they ar e fully covered by paragraphs 2(a) and 3(c) of
the Enabling Clause.167
                                                     
163 Third-party submission of Panama, p. 4.
164 Third-party submission of Panama, pp. 4-5.
165 Third-party submission of Panama, p. 5.
166 Third-party submission of Panama, p. 5.
167 Third-party submission of Panama, p. 5.WT/DS246/R
Page 84
5.102  According to Panama, the Drug Arrangements also promote industrial development which
simultaneously triggers a chain of social benefits, culminating in an improved quality of life as well as
boosting commercial growth.  This is reflected in  improved production capacity which should lead to
an increased land area being devoted to sowing, as well as the establishment of new domestic export
firms, flows of investment capital, better employme nt conditions and a sooner than expected decline
in criminal opportunities.168
5.103  Panama asserts that the positive effects of the Drug Arrangements in promoting local
development can be witnessed by the fact that the majority of the more than 140 companies engaged
in non-traditional export products that were registered in Panama in 2001 are located in rural areas.169
5.104  Panama states that the European Communities has directed this special stimulus scheme to
those countries traditionally susceptible to drug trafficking problems in any of their criminal forms.
Accordingly, Panama is of the view that the Drug Arrangements are consistent with the spirit of tariffpreference schemes insofar as any additional favourable and differential treatment has trade and
development objectives.
170
G. PARAGUAY
1. Introduction
5.105  Paraguay states it has a substantial interest in this matter from two distinct standpoints.  First,
the matter before the Panel involves systemic issues that have a significant bearing on the
interpretation and application of basic principles of the multilateral trading system, particularly the
most-favoured-nation-treatment obligation ("MFN" ) and the proper application of the provisions
concerning Special and Differential Treatment (S&D) to developing countries.  It is in Paraguay's
interest that the Panel does not create exceptions from the MFN principle that have not beennegotiated among Members and preserves the rights and obligations of Members as stipulated in
Article 3.2 of DSU.
5.106  On a more specific level, Paraguay states it has a particular interest in this dispute as one of
the developing country Members adversely affected by the Drug Arrangements.  Tariff preferences
granted to some developing countries adversely affect the exports of all developing countriesexcluded from the tariff preferences.  To that extent , the "cost" of the preferences granted to a limited
group of developing countries is borne by the developing countries excluded from the Drug
Arrangements, including Paraguay.
5.107  Paraguay states that it has suffered and contin ues to suffer from the discriminatory treatment
accorded by the European Communities.  Paraguay has consistently maintained in various fora of the
WTO that tariff preferences accorded to developing countries under the Enabling Clause must, in
accordance with its terms, be formulated and applied in a "generalized, non-reciprocal and non-discriminatory" manner.
2. Preliminary issue of joint representation
5.108  With respect to the preliminary issue of joint representation raised by the European
Communities during the first panel meeting, Paraguay and India  submitted a joint statement to the
                                                     
168 Third-party submission of Panama, p. 6.
169 Third-party submission of Panama, p. 6 and footnote 8 where is stated: The basic exports of these
companies were melons, watermelons, leather etc.  Panamanian plant product exports amounted to B 173.7
million in 2001.  The final destination of  85.5 per cent of those exports (B 139.4 million) was the European
Union, from which it must be concluded that the emergence of those companies was due to the development ofPanama's relations with the market concerned during that period.
170 Third-party submission of Panama, p. 6.WT/DS246/R
Page 85
Panel on 14 May confirming that both India and Paraguay had consented to be represented
simultaneously by the ACWL in this dispute.
5.109  In a communication to the Panel dated 28 May 2003 regarding this preliminary issue171,
Paraguay stated that in light of the fact they are both developing countries, India and Paraguay are
entitled to the support of the ACWL, whether as parties or as third parties.  Paraguay also recalls theAppellate Body statement in EC – Bananas III  that it, "can find nothing in the … WTO Agreement,
the DSU or the Working Procedures, nor in customar y international law or the prevailing practice of
international tribunals, which prevents a WTO Member from determining the composition of its
delegation in Appellate Body".  Paraguay claims that the same observation applies equally to the
composition of the delegation in panel proceedings.
5.110  Paraguay contends that  the WTO dispute settlement procedures establish rules of ethics for
panelists and members of the Appellate Body but not for lawyers representing the Members of theWTO, whether they are lawyers of a Member's legal service or lawyers engaged for a particular
dispute.  Paraguay is of the view that conflicts of interest concerns would normally be the primary
concern of the individual Members involved.  For these reasons, Paraguay believes that the request of
the European Communities for the Panel to rule on the matter of legal ethics lacks basis and should be
rejected.
3. Systemic concerns
(a) The elimination of discrimination is a primary objective of the multilateral trading system
5.111  Paraguay states that one of the primary objectives of the WTO Agreement, as stated in its
preamble, is "the elimination of discriminatory treatment in international relations".
5.112  Paraguay argues the elimination of discriminatory treatment is a fundamental element of the
rules of the multilateral trading system.  The interpreter of the WTO Agreement must therefore
assume that the principle of non-discrimination applies unless the Members of the WTO have
explicitly and clearly agreed otherwise.  Any departure from the MFN principle entails trade benefits
for some and trade losses for others, and thereby modifies the negotiated balance of rights and
obligations.  Any departure from this principle can therefore only result from negotiations amongMembers.  The Members of the WTO have never agreed that the developed countries may grant tariff
preferences to a selected group of developing countries.  The European Communities has sought the
required agreement by requesting a waiver but has failed to obtain it.  The Drug Arrangements have
therefore remained unilateral and consequently are WTO-inconsistent departures from the MFN
principle.
5.113  Paraguay also argues that developing countries had never given their consent that developed
countries could discriminate between developing countries, except in favour of least-developedcountries.
172  Paraguay states that to its recollection, no developed country had ever taken the position
that developed countries could differentiate betw een developing countries under the GSP during the
Uruguay Round negotiations.  Accordingly, Paraguay claims that there may have been violations of
the Enabling Clause at the time the Uruguay Round negotiations were taking place, but Members had
chosen to tolerate those violations then.173
                                                     
171 Letter of 28 May 2003 from the Permanent Mission of Paraguay to the Panel regarding the role of
the Advisory Centre on WTO Law as counsel to both India and Paraguay.
172 Second oral statement of Paraguay, para. 6.
173 Second oral statement of Paraguay, para. 7.WT/DS246/R
Page 86
(b) The issue of discrimination on the basis of "objective criteria" is not a matter before the Panel
5.114  The European Communities and India agree that under the Enabling Clause, preferential tariff
treatment under the GSP must be "non-discriminatory"; however they differ in their interpretations of
this term.  The European Communities alleges that  the Enabling Clause permits developed countries
to treat differently "developing countries which, according to objective criteria have different
development needs.174
5.115  According to Paraguay, this argument is not pertinent to the measures India decided to submit
to the Panel.
5.116  Paraguay asserts the measures at issue are the Drug Arrangements as set out in the
Regulation.  Unlike the provisions governing the special incentive arrangements for the protection of
labour rights or the special incentive arrangements for the protection of the environment, the
provisions of the Regulation establishing the Drug Arrangements do not establish:  (i) any "objectivecriteria" for the inclusion of developing countries in the Drug Arrangements;  nor (ii) any procedure
or criteria for their inclusion.  The provisions simply state that a group of named countries are entitled
to special preferences.   Paraguay is not part of that group and nowhere does the Regulation state
which "objective criteria" Paraguay would have to meet to become part of that group.  Paraguay
argues that the plain fact is that the incentives under the Drug Arrangements are confined to specificbeneficiaries pre-designated by the European Communities, not to countries meeting certain criteria.
5.117  Paraguay argues that the measures at issue thus discriminate in favour of specified countries,
not in favour of countries meeting defined criteria.  The question of whether the Enabling Clause
permits the European Communities to adopt GSP schemes that discriminate between developing
countries on the basis of objective criteria is therefore not a matter before the Panel for purposes ofArticle 11 of the DSU.  In any case, as elaborated below, the Enabling Clause does not authorize
differentiation in treatment between developing countries.
5.118  Paraguay argues that the European Communities' interpretation of non-discrimination based
on criteria of "legitimate objectives" and "reasonable means" is too open-ended to provide any
assurances that abuses will not occur and that such abuses can be legally disciplined by panels in aconsistent manner.
175
(c) The Enabling Clause in any case does not permit differentiation in treatment between
developing countries in the context of GSP schemes
5.119  Paraguay states that all developing countries have different development needs.  The Enabling
Clause does not permit developed countries to grant differential treatment to some developing
countries on the basis that they have "different development needs".  If this were the case, there would
be no need to explicitly provide for paragraph 2(d) of the Enabling Clause, which specificallyauthorizes " special treatment of the least developed  among the developing countries in the context of
any general or specific measures in favour of developing countries".  Thus, discrimination between
developing countries  is envisaged only for the least-developed countries, not for any group of
developing countries having "different development needs", whether least developed or not.  It is not
sufficient for the European Communities  to assert th at its criterion for differentiation is "justified", it
must show that the criterion for differentiation used by it is expressly envisaged under the Enabling
Clause.  Paraguay claims that it has manifestly failed to do so in the present case.
5.120  Paraguay contends that not only is the European Communities' interpretation contradicted by
paragraph 2(d) of the Enabling Clause, it also runs contrary to the agreement reached between
                                                     
174 First written submission of the European Communities, para. 84.
175 Second oral statement of Paraguay, para. 17.WT/DS246/R
Page 87
developing and developed countries in the context of the UNCTAD, as reflected in paragraph 2(a) of
the Enabling Clause.  Paragraph 2(a) limits th e scope of departure from Article I:1 of GATT 1994
solely to preferential tariff treatment which is  in accordance with the "Generalized System of
Preferences" as described in the "Decision of the Contracting Parties of 25 June 1971" (the 1971
Waiver").  The 1971 Waiver authorizes a waiver from Article I:1 of GATT 1994 to allow "developedcontracting parties … to accord preferential treatment to products originating in developing countries
and territories generally the preferential tariff treatment refe rred to in the Preamble to this Decision ".
The preamble in turn states:
"… Recalling  that at the Second UNCTAD, unanimous agreement was reached in
favour of the early establishment of a mutually acceptable system of generalized,
non-reciprocal and non-discriminatory preferences beneficial to the developing
countries in order to increase the export earnings, to promote the industrialization,and to accelerate the rates of economic growth in these countries;
Considering  that mutually acceptable arrangements have been drawn up in the
UNCTAD concerning the establishment of generalized, non-discriminatory, non-
reciprocal preferential tariff treatment in the markets of developed countries for
products originating in developing countries " (emphasis added)
5.121  Paraguay notes that the mutually acceptable arrangements drawn up in UNCTAD are
contained in the "Agreed Conclusions of the Special Committee on Preferences"176 ("Agreed
Conclusions") adopted by the Trade and Development Board on 13 October 1970.  The Agreed
Conclusions represent the outcome of negotiations held over a period of over two years pursuant to
Resolution 21 (II) of the Second Conference held in New Delhi.
5.122  According to Paraguay, under the European Communities' interpretation, subgroups of
developing countries can be singled out for preferential treatment as long as, "according to objective
criteria they have different development needs", which implies that developed country Members can
unilaterally determine those criteria.  However, under the Agreed Conclusions, no such flexibility was
envisaged.  They merely envisaged that the developed countries could:  (i) utilize "safeguardmechanisms"
177;  and (ii) arguably, exclude certain countries from beneficiary status altogether.178
However, Paraguay claims there is absolutely no reference to the notion that the developed countriesshould be able to distinguish between the countries that they have recognized to be developing
countries.  This is also clear from Part V of the Agreed Conclusions which expressly refers to "Special
Measures in Favour of the Least Developed Among the Developing Countries".  No further basis for
differential treatment between developing countries was envisaged.
5.123  Paraguay submits that following the European Communities' reading of the Enabling Clause,
it is possible to grant tariff preferences to a set of developing countries without granting the same
tariff preferences to least-developed countries, as long as the set of developing countries have distinct
development needs.  This illustrates the difficulty with the standard proposed by the European
Communities.  According to Paraguay, least-developed countries could experience trade diversion to
developing countries merely because these favoured developing countries have a "developmentalneed" considered to be especially pressing by a developed country.  In the present case, it is
difficulties faced on account of drug production and trafficking; but in others it could be, for example,
"transition from military rule", "high population growth ", "literacy rate", "high levels of corruption",
or "degree of rural electrification".  While developing countries have a variety of developmental
needs; the Enabling Clause does not allow developed country Members to pick and choose amongst
                                                     
176 Report of the Special Committee on Preferences on the second part of its fourth session,
21 September – 12 October 1970 ( TD/B/ 329/ Rev.1).
177 Part III of the Agreed Conclusions.
178 Part IV of the Agreed Conclusions.WT/DS246/R
Page 88
these needs in granting tariff preferences.  Instead, it envisages one uncontroversial category of
permissible differentiation in favour of the countries determined by the United Nations to be the most
needy – special treatment for least-developed countries.  Paraguay submits that the European
Communities fails to explain how the developmental problems of countries confronting drug
production and trafficking are unique and more pressing than the developmental problems faced byother developing countries on account of a host of other factors.
5.124  Paraguay further argues that if the Europ ean Communities' interpretation of the Enabling
Clause is upheld, the GSP would be an instrument to exercise undue influence towards developing
countries by granting tariff preferences selectively.  This in turn would transform the GSP from an
instrument of generosity of developed countries into a perversion of the GSP that is detrimental to the
developing countries.
179
5.125  Paraguay posits that the implication of the European Communities' approach is that developed
countries could manipulate the GSP system so as to pursue their own political agenda and that the
rule-based character of the multilateral trading system would be completely undermined.  In this
context, Paraguay emphasizes that the rules-based multilateral trading system was established
precisely to ensure a level playing field in which all Members, regardless of their level of economic
development or political power, conduct their trade relations in accordance with rules and normsestablished by the Members themselves acting through the WTO.  Paraguay argues that the European
Communities' approach further exacerbates the intrinsic disadvantages of developing countries.
5.126  Paraguay submits it is clear that the discriminatory nature of the Drug Arrangements results in
obstacles to exports of the developing countries discriminated against.  The Drug Arrangements have
pernicious effects on current exports and also impede the creation of future trade opportunities.  Anyassessment of the measures before the Panel must take into account the need of investors and traders
for clear and predictable rules permitting them to plan their activities.  Paraguay asserts that creating
the possibility for developed countries to distinguish between the developing countries on the basis of
unilaterally determined criteria would remove all predictability in the trade relations between
developed and developing countries.
5.127  Paraguay is of the view that the European Communities' interpretation of the concept of non-
discrimination cannot therefore be reconciled with paragraph 3(a) of the Enabling Clause, which
mandates that GSP schemes "shall be designed to facilitate and promote  the trade of developing
countries".  Nor can it be reconciled with the requirements of paragraph 3(c) of the Enabling Clause
which stipulates that GSP schemes shall be designed to respond positively to the "trade needs" of
developing countries.
5.128  Paraguay rejects the European Communities' argument that paragraph 3(c) of the Enabling
Clause provides a basis for it to effectively determine what the developing needs of developing
countries are and consequently to provide differential treatment between developing countries on that
basis.
180  Accordingly, Paraguay argues that in EC – Bananas III  the Appellate Body affirmed that the
non-discrimination obligation of the GATT 1994 such as Article I:1 thereof, apply to imports of like
products, except when these obligations are specifically waived.  Therefore, Paraguay submits that theterm "non-discrimination" pursuant to the Enabling Clause is the same as "non-discrimination" under
Article I:1 of GATT 1994, since the Enabling Clause is part of the GATT 1994.
181 Paraguay states
that paragraph 3(c) deals with the design  of the tariff preferences (e.g. product coverage, depth of
                                                     
179 First oral statement of Paraguay, para. 9.
180 First oral statement of Paraguay, para. 16.
181 First oral statement of Paraguay, para. 18.WT/DS246/R
Page 89
tariff cuts) and not the principle of non-discriminatory treatment in the context of Article I:1 of
GATT 1994.182
(d) The waiver mechanism provides the required flexibility
5.129  Paraguay argues that if Members wish to implement discriminatory measures inconsistent
with their obligations under the WTO Agreement, they may do so only by resorting to Article IX ofthe WTO Agreement.  Article IX of the WTO Agreemen t provides them with the flexibility to deviate
from their WTO obligations.  The waiver procedures give potentially affected Members the
opportunity to redress any adverse effect of preferences favouring a group of countries by negotiating
compensatory market access commitments.  In this way, Article IX limits the damage caused to other
Members by measures which are not consistent  with the provisions of the WTO Agreement.
5.130  Paraguay states that in 1976 it was affected by the special and differential treatment granted
only to ACP Countries under the Lomé Convention.  Nonetheless, the European Communitiesresorted to the waiver mechanism in order to obta in the consent of the membership and redress the
damage to the affected developing countries.  As a result, other Members, including Paraguay, were
given the opportunity to request compensatory concessions from the European Communities.
5.131  Paraguay maintains that the present situation is completely different.  By unilaterally
proceeding to implement the Drug Arrangements without the benefit of a waiver, the EuropeanCommunities has disregarded the multilateral nature of the WTO system and has deprived Paraguay
and other developing country Members of the opportunity to mitigate the damage created by the
discriminatory character of the Drug Arrangements.
4. Concerns specific to the situation of Paraguay
5.132  Paraguay states that many developing countr ies which face drug problems are excluded from
the coverage of the Drug Arrangements.  The European Communities has even referred to some of
these countries in paragraph 140 of its submission.  As far as Paraguay is concerned, due to its
specific geographical location, it faces severe drug trafficking problems.  Paraguay points out that its
government and society are engaged in combating this problem.  Considerable resources have had to
be reallocated from other social endeavours in order to deal with it.  The situation of Paraguay interms of drug trafficking is comparable to that of some of the countries included as beneficiaries
under the Drug Arrangements.  Yet, Paraguay recalls that it has not been included in the Drug
Arrangements, which calls into question the European Communities' claim that the designation of
beneficiary countries of the Drug Arrangements is "made in accordance with objective,
non-discriminatory criteria".
183
5.133  Paraguay states that it also is severely affected by drug-related problems.  Paraguay's
problems have been acknowledges by other countries in the region including some of thebeneficiaries, which have signed various cooperation agreements with Paraguay in the fight against
drug production and trafficking.
184  However, despite its drug-related problems, Paraguay does not
seek to benefit from measures which undermine the right of developing countries to MFN
treatment.185 Paraguay states that it believes that the long-term interests of all the developing countries
are better served by a secure and predictable trading system where the rules are consistentlyapplied.
186
                                                     
182 First oral statement of Paraguay, para. 19.
183 First written submission of the European Communities, para. 116.
184 First oral statement of Paraguay, para. 19.
185 First oral statement of Paraguay, para. 20.
186 First oral statement of Paraguay, para. 21.WT/DS246/R
Page 90
5.134  Paraguay claims that the Drug Arrangements have caused trade diversion since its first
inception in 1990.  Prior to 1990, several Paraguayan goods were competitive export commodities to
the European Communities.  Paraguay states that after the introduction of the Drug Arrangements,
exports of these products from Paraguay to the European Communities considerably declined.  In
contrast, exports of like products from some of the beneficiary countries have risen.  Thus, Paraguayrestates that the implementation of the Drug Arrang ements has resulted in trade diversion in favour of
the beneficiary countries.
5.135  Paraguay asserts that its enterprises are at a competitive disadvantage vis-à-vis their
competitors in the beneficiary countries not only because they are denied equivalent market access
opportunities.  Paraguayan enterprises also have to bear the cost of combating drug trafficking
(through internal taxes).  Even within Paraguay's domestic market, the negative effects of the tariff
preferences are felt.  While several of Paraguay's products cannot enter the European Communitiesbecause of the competitive disadvantages resulting from the tariff preferences under the Drug
Arrangements, producers in the beneficiary countrie s are able to enhance their export capacity and
thereby attain  economies of scale in production.  Paraguayan producers are unable to attain similar
economies of scale.  As a result, Paraguay argues that producers in other beneficiary countries have
enhanced their competitive position vis-à-vis  Paraguayan producers even in the Paraguayan domestic
market.
5.136  Paraguay states that 90 per cent of its exports are agricultural and that the discriminatory
barriers encountered by Paraguayan exports in the European Community market have had a
detrimental effect on its economy.
187
5.137  Paraguay states that not only is there trade diversion both in the European Community market
and in the Paraguayan domestic market.  As a result of the discriminatory tariff preferences under the
Drug Arrangements, there has also been an "inves tment diversion".  The proximity between Paraguay
and some of the beneficiary countries creates the incentive to shift investments away from Paraguay
and towards these countries.  Moreover, internationa l investment flows in sectors benefiting from the
Drug Arrangements are diverted away from Paraguay.  Paraguay notes that in instance, three majorindustries which had previously invested in Paraguay had to transfer these investments to other
developing countries enjoying preferential tariff treatment.
188
5.138  Paraguay claims the damage that the implementation of the Drug Arrangements has caused to
it is exacerbated by the particularities of the geographical location of Paraguay.  As a land-locked
nation, Paraguay has to bear higher transport costs in order to export its products to the European
Communities.  The development of Paraguay is critically affected by this factor.  On the European
Communities reading of the Enabling Clause, a GSP truly responsive to the needs of development cantherefore not focus exclusively on the problems specific to a selected group of countries.  Paraguay
argues that it must take into account the considerable variety of problems facing the developing
countries and therefore create benefits for all of them.
5. Conclusion
5.139  Paraguay submits that the Drug Arrangements are inconsistent with the requirements of the
MFN obligation under Article I:1 of GATT 1994 and are not justified under the Enabling Clause.  As
a result, Paraguay has suffered from trade and investment diversions.
5.140  Paraguay requests the Panel to find that the measures at issue are inconsistent with the
European Communities' obligations under the WTO Agreement.  In the absence of a waiver agreed
upon by the membership, Paraguay respectfully requests the Panel to suggest to the European
                                                     
187 First oral statement of Paraguay, para. 26.
188 First oral statement of Paraguay, para. 24.WT/DS246/R
Page 91
Communities to apply the tariff preferences under the Drug Arrangements to all developing countries,
as contemplated under the Enabling Clause.
H. UNITED STATES
1. Introduction
5.141  The United States asserts that it is participating in this dispute because of the systemic
importance of the issues presented, and the potential implications of any recommendations and rulings
by the DSB.  The United States asserts that it takes no position on whether the Drug Arrangements are
consistent with the European Communities' WTO obligations.  The United States urges the Panel to
adopt a careful, prudent approach in resolving this di spute, one which is confined to the specific facts
in this case and which takes care to avoid going beyond the particular circumstances of this dispute.189
5.142  The United States is of the view that the Enabling Clause is not an affirmative defence, but
rather a positive rule that authorizes Members to grant trade preferences to developing countries undercertain circumstances.
190 The United States disagrees with India that the wording of paragraph 1 of the
Enabling Clause requires developed countries to extend any advantage accorded under a GSP scheme
to all developing countries.191 The United States also disagrees with India's interpretation of "non-
discriminatory" under the Enabling Clause.192  In addition, the United States addresses various issues
regarding Article XX of GATT 1994193, as well as, the preliminary issue of legal representation raised
by the European Communities during the first substantive meeting of the Panel.194
2. The preliminary issue of legal representation
5.143  The United States notes that the preliminar y issue raised by the European Communities
involves the common legal representation of a party to the dispute and a third party.  The United
States indicates that it would agree with the European Communities if its argument is that, as ageneral matter, third parties could not use common representation as a way to enhance their rights,
role, or status in a dispute.  However, the United States emphasizes that there is no indication that this
is the case in this dispute.  To address this concern, it should be made clear when the ACWL is
speaking on behalf of India, and when it is speaking for other delegations.  The United States asserts
that it does not see a bar in principle to the ACWL representing more than one party in this particular
dispute.  The United States notes that conflicts of interest concerns would normally be the primary
concern of the individual Members involved.  The United States also states that given the decision on
expanded third-party rights, it is not clear that there is a confidentiality issue in this case.
195
3. The Enabling Clause excludes the application of Article I:1 of GATT 1994
5.144  The United States agrees with the European Communities that the Enabling Clause is not an
affirmative defence justifying a violation of Article I:1 of GATT 1994.  According to the United
States, the Enabling Clause forms part of the GATT 1994 as an "other decision" pursuant toparagraph (1)(b)(iv) of GATT 1994.  Therefore, the Enabling Clause has co-equal status with the
GATT 1947 (part of the GATT 1994 pursuant to paragraph 1(a) thereof).  In this regard, the Enabling
                                                     
189 Third-party submission of the United States, para. 2;  first oral statement of the United States,
para. 14.
190 Third-party submission of the United States, paras. 4-9;  second oral statement of the United States,
paras. 2-4.
191 First oral statement of the United States, paras. 2-6.
192 First oral statement of the United States, paras. 7-14.
193 Third-party submission of the United States, para. 10;  second oral statement of the United States,
paras. 6-8.
194 First oral statement of the United States, para. 15.
195 First oral statement of the United States, para. 15.WT/DS246/R
Page 92
Clause is part of the overall balance of rights and obligations agreed to in the GATT 1994 and the
WTO Agreement, and is not merely an "affirmative defense" to Article I:1 of the GATT 1947.196
5.145  The United States points to the phrase, " [n]otwithstanding the provisions of Article I of the
General Agreement" as excluding the application of Article I:1  of GATT 1994.  The United States
points out that the dictionary definition of the word  "notwithstanding" is "in spite of", which in turn
denotes that Members may grant preferential treatment under the Enabling Clause "in spite of" the
obligation to extend MFN treatment unconditionally.197
5.146  The United States asserts that unlike the 1971 Waiver, the Enabling Clause contemplates a
general, permanent and separate authorization that is available "notwithstanding" Article I:1 of GATT
1994.  In this respect, there is no need to determine whether a measure is inconsistent with Article I:1
of GATT 1994 before applying the Enabling Clause.  The Enabling Clause is a positive rule providing
authorization and establishing obligations in itself.198
5.147  The United States likens the situation in this dispute with that of US – Wool Shirts and
Blouses , where the Appellate Body held that a provision described by a party as an "exception" was
not an affirmative defence, but rather was "an integral part" of the arrangement under the Agreement
on Textiles and Clothing that "reflects an equally carefully drawn balance of rights and
obligations."199
5.148  According to the United States, not only is India's legal position incorrect, but the
consequences of its interpretation would be unfortunate.  In this regard, the United States asserts that
placing the burden on developed countries to defend actions that benefit developing countries would
create a disincentive for developed countries to voluntarily grant preferential treatment under the
Enabling Clause.  Additionally, this would have the unfortunate effect of making treatment moredifficult to defend.  Accordingly, India would have the Panel conclude that preferential tariff
treatment should be presumed not to be covered under the Enabling Clause, and that it is incumbent
upon the developed country to prove otherwise.
200
5.149  The United States claims that India's argumentation also suffers from internal contradictions.
On the one hand, regarding the "affirmative defence" claim, India asserts that paragraph 2(a) does notimpose positive obligations or positive rules establishing obligations in themselves, while on the other
hand, India claims that preferential tariff treatment must be non-discriminatory and states, "[t]here is
no dispute that this is a binding requirement."
201 According to the United States, India cannot have it
both ways, seeing legal requirements in the text when they benefit India, while denying the existence
of obligations when it wants the European Communities to bear the burden of proof.202
5.150  In light of the foregoing, the United States rejects India's claim that the European
Communities bears the burden of proving that the Drug Arrangements are consistent with theEnabling Clause because it is an "affirmative defence".  The United States asserts that India's
argument that the Drug Arrangements are inconsistent with Article I:1 of GATT 1994 is irrelevant,
                                                     
196 Third-party submission of the United States, paras. 4-5.
197 [emphasis original] Third-party submission of the United States, para. 6.
198 Third-party submission of the United States, para. 7.
199 Third-party submission of the United States, para. 8, where in footnote 5 it cites, US – Wool Shirts
and Blouses , DSR 1997:1, 323, at 337 .
200 [emphasis original] Second oral statement of the United States, para. 3.
201 Second oral statement of the United States, para. 4, where in footnote 4 it refers to para. 79 of
India's second submission.
202 Second oral statement of the United States, para. 4WT/DS246/R
Page 93
unless India can first establish that the Drug Arrangements are inconsistent with the Enabling
Clause.203
4. "All" developing countries
5.151  The United States disagrees with India that the wording of paragraph 1 of the Enabling Clause
requires developed countries to extend any advantage accorded under a GSP scheme to all developingcountries.  The text of the Enabling Clause leads to the opposite conclusion.
204
5.152  According to the United States, India's argument that "developing countries" in paragraph 1
must be read as though the term "all" had been inserted before "developing countries" is groundless
because the Enabling Clause refers in all cases either to "developing countries" or "the developing
countries" and never to " all developing countries".  Moreover, India's interpretative approach does not
work in other parts of the Enabling Clause.  The United States argues that India would certainly not
support the parallel argument that the use of the word "parties" in  "developed contracting parties" ofparagraph 2(a) means that "all developed countries" must accord preferential tariff treatment in order
for any developing country to take advantage of it.
205
5.153  The United States agrees with the European  Communities and other third parties that the
reference in paragraph 1 of the Enabling Clause to "other contracting parties" cannot be limited to
"other developed  contracting parties", as India suggests.  According to the United States, the Enabling
Clause allows India and other developing countries to grant differential and more favourable
treatment to other developing countries.  The Enabling Clause specifically provides for developing
countries to grant preferential treatment to other developing countries, as in the case of
paragraph 2 (c).206
5.154  The United States contends that if India's interpretation of paragraph 1 were correct, it would
render paragraph 2(c) a nullity, as less-developed countries that had entered into an arrangement
under paragraph 2(c) would have to extend preferential treatment to all developing counties, including
those that had not entered into such arrangement.  In addition, the United States contends that
paragraph 2(d) of the Enabling Clause is also directly at odds with India's argument that all
developing countries must be treated the same.  Lastly, the United States agrees with other parties inthis dispute that paragraphs 3(c) and 7 of the Enabling Clause demonstrate that India's "one size fits
all" approach is incompatible with the Enabling Clause.
207
5. The Enabling Clause reference to "non-discriminatory"
5.155  The United States notes that paragraph (a) of the 1971 Decision permits developed country
contracting parties to accord preferential tariff  treatment to products originating in developing
countries and territories "with a view to extending  to such countries and territories generally the
preferential tariff treatment referred to in the Preamble to this Decision."  The 1971 Decision does notelaborate on the significance of the use of the term "with a view to", but rather simply requires that the
treatment must be that referred to in the preamble.  The preamble notes unanimous UNCTAD
agreement on establishment of a (1) mutually acceptable system of (2) generalized, (3) non-reciprocal
and (4) non-discriminatory preferences beneficial to the developing countries.
208  The United States
claims that India's arguments ignore the elements other than non-discriminatory.209
                                                     
203 Third-party submission of the United States, para. 9.
204 First oral statement of the United States, para. 3.
205 [emphasis original] First oral statement of the United States, para. 4.
206 [emphasis original] First oral statement of the United States, para. 5.
207 [emphasis original] First oral statement of the United States, para. 6.
208 First oral statement of the United States, para. 8.
209 First oral statement of the United States, para. 9.WT/DS246/R
Page 94
5.156  The United States disagrees with India's argument that "non-discriminatory" in the context of
the Enabling Clause means "unconditionally" as the term is used in Article I:1 of GATT 1994.  The
United States notes, like other parties involved in this dispute, that the word "unconditionally" is
simply not found in the text of the Enabling Cl ause.  As previously mentioned, the United States
asserts that the Enabling Clause excludes the application of Article I:1 altogether, including  the"unconditionally" requirement of Article I:1 of GATT 1994.  In light of the fact that the Enabling
Clause excludes the application of Article I:1 of  GATT 1994, and that the Enabling Clause does not
include an "unconditionally" requirement, the United States claims it is not necessary for the Panel to
address the European Communities' extended arguments on the meaning of the word
"unconditionally."
210
5.157  The United States contends that in the same way India seeks to import into the Enabling
Clause the "unconditionally" requirement of Article I:1 of GATT 1994, it also seeks to import into theterm "non-discriminatory" a "conditions of competition" test similar to that applied under some, but
not all, of the provisions of Articles I and III of GATT 1994.  However, the United States maintains
that unlike Articles I and III of GATT 1994, th e 1971 Decision simply employs the term "non-
discriminatory," and there is no indication that the analysis of this term is intended to be the same as
that under a "like product" analysis.  The United States asserts that the Appellate Body has recognizedthat "discrimination" is not the same as the "n ational treatment" test under Article III of GATT
1994.
211
5.158  The United States generally agrees with the European Communities that a GSP scheme may
be described as "non-discriminatory" if it differentiates between unequal situations.  As previously
mentioned, paragraphs 3(c) and 7 of the Enabling Clause appear to contemplate explicitly thatpreferential treatment need not be granted on a "one size fits all" basis and that distinctions among
developing countries tailored to their development, financial and trade needs are specifically
contemplated.  According to the United States, India's approach to "non-discriminatory" would appear
to render "generalized" redundant or meaningles s since "generalized" means "less than all".
212
5.159  The United States does not disagree with the European Communities that a GSP scheme may
be described as "non-discriminatory" if based on objective criteria and on an overall assessment of all
relevant circumstances.  The United States asse rts that under India's approach, GSP schemes would
have to be administered on a "lowest common denom inator" basis.  In this respect, a GSP scheme
could be applied only to the extent it addressed needs that were identical among developing countries,
and it could not be adapted with respect to particular needs of sub-sets of developing countries.  The
United States notes that the 1971 Decision calls for a "mutually acceptable system" of preferences,
and that a Member has the right, not the obligation, to accord preferential treatment.  Accordingly, the
United States emphasizes that while a "one size fits all" obligation to grant any preferences to all
developing countries may be acceptable to India for purposes of this dispute, it is doubtful that it
would be acceptable to other beneficiary countries or  to GSP donor countries, or even to India in a
different dispute.213
5.160  The United States joins the many developing third party countries in this dispute that have
pointed out the practical difficulty of reading legal obligations into the Enabling Clause not found in
the text.  The United States asserts that India is asking the Panel to read into the Enabling Clause an
obligation that is not legally supported in the text and that, as a matter of trade policy, would, contrary
                                                     
210 First oral statement of the United States, para. 10.
211 First oral statement of the United States, para. 11 and footnote 12 where it cites the Appellate Body
Report, US – Gasoline , p. 23.
212 First oral statement of the United States, para. 12 and footnote 14 where it cites, The New Shorter
Oxford Dictionary , 4th Edition, p. 1074 (defining "generalize" as "Bring into general use; make common,
familiar, or generally known; spread or extend; apply more generally; become extended in application.").
213 [emphasis original] First oral statement of the United States, para. 13.WT/DS246/R
Page 95
to the purpose of the Enabling Clause, create a disincentive  for Members to extend tariff preferences
to developing countries.214
6. Article XX of GATT 1994
5.161  The United States asserts that it takes no position on whether the European Communities'
measures are inconsistent with Article XX of GATT 1994.  According to the United States, there is noneed for the Panel to address this issue as the dispute should be decided on the basis of the Enabling
Clause.
215 Nonetheless, the United States comments that both the European Communities and India
err in their use of the phrase "least trade restrictive measure" in addressing whether the Drug
Arrangements are "necessary" under Article XX(b) of GATT 1994.216
5.162  The United States submits that nowhere in the ordinary meaning of "necessary" is there a
meaning of "least trade restrictive", nor does "necessary" take on the meaning of "least trade
restrictive" from the context of Article XX or the object and purpose of the GATT 1994.  The UnitedStates notes that the concept of "not more trade-restrictive" appears in both the Agreement on
Technical Barriers to Trade and the Agreement on the Application of Sanitary and Phytosanitary
Measures.  Therefore, the fact that the WTO drafters did not use this phrase in the GATT 1994
demonstrates, according to the United States, that they did not intend to include this concept in
Article XX(b).
217
5.163  The United States notes that the Appellate Body addressed the applicable standard for
evaluating whether a measure is "necessary" under Article XX(b) of GATT 1994 in  EC – Asbestos
and did not use the standard of "least trade restrictive".  The issue before the Appellate Body was
whether an alternative measure is reasonably available that is "not inconsistent with" other GATT
provisions, or if no such alternative measure is reasonably available, whether the measure chosen"entails the least degree of inconsistency with other GATT provisions".  The United States argues that
"less inconsistent" would require one to examine the degree of inconsistency with the Agreement,
whereas "less trade restrictive" would require one to examine the degree of trade effect of a
measure.
218  
VI. INTERIM REVIEW
A. INTRODUCTION
6.1 The Panel issued the Draft Descriptive Part of its Report to the parties on 8 August 2003, in
accordance with Article 15.1 of the DSU.  Both parties offered written comments on the Draft
Descriptive Part on 15 August 2003.  The Panel noted all these comments and amended the draft
descriptive sections where appropriate.  The Panel issued its Interim Report to the parties on
5 September 2003, in accordance with Article 15.2 of the DSU.  On 23 September 2003, both India
and the European Communities requested that the Panel review certain precise aspects of the InterimReport.  While the European Communities' request concerns certain paragraphs of the Findings
section of the Report, India's request relates solely to certain paragraphs in the dissenting opinion
section of the Report.  Neither of the parties requested an interim review meeting.  On 30 September,
India and the European Communities provided written comments on each others' requests, as
                                                     
214 [emphasis original] First oral statement of the United States, para. 14.
215 Third-party submission of the United States, para. 10; second oral statement of the United States,
para. 6.
216 Second oral statement of the United States, para. 6.
217 Second oral statement of the United States, para. 7.
218 Second oral statement of the United States, para. 8 and footnote 7 where it cites the Appellate Body
Report, EC – Asbestos , paras. 170-171.WT/DS246/R
Page 96
permitted by the Panel's working procedures.  Th e Panel has carefully reviewed the arguments made
by both parties and addresses them in this section in accordance with Article 15.3 of the DSU.219
B. COMMENTS BY THE EUROPEAN COMMUNITIES
1. Joint Representation of India and Paraguay
6.2 The European Communities requested the Panel to change its wording in paragraphs 7.14 and
7.17 of the Interim Report so that instead of stating the European Communities "acknowledged" that
the issue of confidentiality does not arise in this dispute due to the enhanced third party rights granted
to all third parties, the Panel would describe the European Communities' position as being that the
problem was "mitigated", but not entirely eliminated.  The European Communities cited its letter of 4
June 2003 to the Panel on this issue in support of its request:
"As noted in the EC's statement at the first meeting, the fact that third parties have
been granted enhanced rights mitigates the problem, but does not dispose of itentirely.  The enhanced rights accorded to third parties do not include the access to all
procedural documents made available to the main parties.  In particular, third parties
have not been granted access to the Interim Report.  Yet Paraguay's counsel will have
access to the Interim Report, while the other third parties will not.  Thus, by sharing
its legal counsel with India, Paraguay will gain an advantage over all the other thirdparties.  Given the considerable economic impact of this dispute for the third parties
(one of the reasons invoked by the Panel to accord enhanced rights), this advantage
seems particularly unfair."
The European Communities also requested the Panel to  complete its findings by addressing the issue
of whether the situation is compatible with the partie s' obligation to maintain the confidentiality of the
Interim Report and whether it is compatible with the principle that third parties should be treated
equally.
6.3 India commented on this request that the fact that Paraguay and India share the same legal
counsel does not mean that Paraguay is automatically given access to all the documents sent by thePanel to India.  India argued that, in fact, the ACWL had not given the Interim Report to Paraguay
and it would not do so.  In India's view, it was completely unwarranted to accuse India of a violation
of the confidentiality rules of the DSU merely because it used the same legal counsel as a third party.
According to India, the ACWL had adopted rigorous regulations that obliged its staff to respect "the
privileged and confidential nature with a Member in a specific case" and to "exercise the utmost
discretion in regard to all matters of official business".  India therefore indicated that it had the
assurance that its confidentiality obligations under the DSU would be respected by the staff of theACWL.  India maintained that the Panel should re ject the EC's claim that India violated its
confidentiality obligations merely by engaging the same legal counsel as Paraguay.
6.4 India also maintained that the Panel should reject the EC's claim that Paraguay had an
"unfair" litigation advantage over the other third parties simply because its legal counsel had access to
the Interim Report while the legal advisor of the other third parties did not.  India argued that there isno provision in WTO law on which the Panel could base a ruling that considerations of "fairness" of
the kind invoked by the European Communities restricted India's right to choose its legal advisers.
Also, India contended that it failed to see what litigation advantage Paraguay could possibly derive
from the fact that its legal counsel had access to the Interim Report since neither Paraguay nor any
other third parties were entitled to present comments on the Interim Report.
                                                     
219 Section VI of this Report, entitled "Interim Review ", forms part of the Findings of the Final Report
of the Panel, in accordance with Article 15.3 of the DSU.WT/DS246/R
Page 97
6.5 The Panel has considered both parties arguments on this issue and clarified its understanding
of the European Communities' position on this issue as requested.  Accordingly, it makes necessary
adjustments to its analysis in paragraphs 7.14-7.17 as well as inserting a footnote to the same point in
paragraph 7.18.
6.6 The European Communities also requested the Panel to change its wording in paragraph 7.12
which might lead to the understanding that the European Communities had not acted in good faith.
The Panel accepted the proposal and adjusted the language in that paragraph accordingly.
2. Paragraph 3(c)
6.7 The European Communities requested the Panel to replace paragraphs 7.71-7.73 of the
Interim Report with the following text, as a summary of the EC's arguments on this issue:
"The European Communities argues that Paragraph 3(c) supports contextually its
interpretation of the term 'non-discriminatory' in footnote 3.  If donor countries couldnot differentiate among developing countries, they could not achieve the objective set
out in that provision.  India's view that Paragraph 3(c) only permits to take into
account the needs of all the developing countries 'in general', and not their 'individual'
interests, is not supported by the text
220 and would render Paragraph 3(c) irrelevant.221
The omission of the terms 'individual' or 'particular' is not dispositive.222  T h e
Enabling Clause is not consistent when using those terms.223  India overlooks that
Paragraph 3(c) applies also with respect to the preferences for LDCs envisaged under
Paragraph 2(d).224  It is obvious that such preferences must respond to the specific
needs of the LDCs, and not to those of all developing countries.  Moreover, India's
interpretation would have the result that any GSP would have to be administered on a'lowest common denominator basis'.
225
The European Communities notes that Paragraph 3(c) is so broadly drafted that itmight be arguable that it is a purposive provision.
226  To the extent that it imposes a
binding obligation, it should be interpreted in a manner which is both workable and
consistent with the requirements that the preferences be 'generalised' and 'non-discriminatory'.
227  Developed countries cannot take into account each and every
difference between developing countries, but this does not mean that they should be
prevented from approaching the objective of Paragraph 3(c) by applying horizontal
'graduation' criteria, and/or by defining subcategories of developing countries which
capture the most significant differences between them on the basis of a
comprehensive set of objective, non-discriminatory criteria.228  The mere fact that two
countries score differently with respect to a given indicator does not mean that theyhave different 'development needs' for the purposes of Paragraph 3(c).
229  Moreover,
                                                     
220 (footnote original) EC's reply to the Panel's question to India No. 8, para. 102.
221 (footnote original) EC's reply to the Panel's question to India No. 8, para. 108.
222 (footnote original) Ibid., paras. 103-106.
223 (footnote original) Ibid., para. 105.
224 (footnote original) Ibid., para. 107.
225 (footnote original) Ibid., para. 111.
226 (footnote original) EC's reply to the Panel's question to both parties No. 17, para. 57.
227 (footnote original) Ibid., para. 62.
228 (footnote original) Ibid., para. 63.
229 (footnote original) EC's reply to the Panel's question to both parties No. 12, para 46.WT/DS246/R
Page 98
trade preferences are not always the most adequate response to differences in
development needs.230
The European Communities argues that developed countries are free to decidewhether or not to apply a GSP. By the same token, they are also free to decide
whether or not to grant preferences with respect to certain products, as well as tochoose the depth of the tariff cuts. Paragraph 3(c) cannot change this basic premise.
India's 'all or nothing' approach has no basis in the Enabling Clause, would greatly
discourage donor countries and is clearly against the interest of the developing
countries.
231
On the status of the Agreed Conclusions, the European Communities argues thatfootnote 3 refers only to the GSP system as described in the 1971 Decision and not to
the Agreed Conclusions or other UNCTAD texts.  The Agreed Conclusions are notcontext of the 1971 Decision because they are not binding, not all GATT members
were parties to them, and they were not made in connection with the 1971 Decision.
A fortiori , the Agreed Conclusions are not context of the Enabling Clause. The
European Communities submits that the Agreed Conclusions and other UNCTAD
texts are preparatory work for the 1971 Decision and, as such, just a supplementarymean of interpretation.
232  In any event, the European Communities is of the view that
the Agreed Conclusions and the other UNCTAD texts cited by India do not support
India's position.233"
6.8 India commented that since the European Communities had not explained why it considered
the Panel's summary to be incomplete or incorrec tly summarized, it could not reasonably expect the
Panel to correct inaccuracies that it had not identify.  India considered that the purpose of such
summaries was to define the issue analyzed by the Panel, not to provide the reader with an
abbreviated rendering of all of the arguments presented by the disputing parties.  As a result, the mere
fact that the summaries prepared by the Panel did not reproduce all the arguments made by the parties
did not render them incomplete.  For these reasons, India requested that the Panel reject the EC'srequest.
6.9 The Panel considers that the purpose of summarizing parties' arguments under the heading
"Paragraph 3(c)" is to set out each party's interpretation or understanding of paragraph 3(c) and their
views on the interpretative role of the Agreed Conclusions in relation to the Enabling Clause,
including paragraph 3(c).  The Panel needs to describe the basic positions of both parties submitted
during the whole of the proceedings regarding the meaning of paragraph 3(c).  The new paragraphs
that the European Communities requested the Panel to use in place of paragraphs 7.71-7.73 focusmostly on the rebuttal of India's interpretation of paragraph 3(c), rather than on the European
Communities' own interpretation of paragraph 3(c).  Another problem with the proposed text is that
certain parts of it do not address the issue of the meaning of paragraph 3(c), but rather, they address
other paragraphs of the Enabling Clause.
234  Such replacement, in the Panel's view, would not be a
                                                     
230 (footnote original) EC's reply to the Panel's question to both parties No. 12, para. 48.  EC's reply to
the Panel's question to the EC No. 18, paras. 165-168.
231 (footnote original) EC's reply to the Panel's question to India No. 8, para. 111.
232 (footnote original) Second written submission of the European Communities, paras. 34-37.  EC's
reply to the Panel's question No. 44 from the Panel to both Parties.
233 (footnote original) EC's second written submission, para. 38;  EC's reply to the Panel's question to
both parties No. 52, para. 57;  EC's comment on India's reply to the Questions to India No. 16.
234 For example, the very last sentence of the proposed text stated that "[i]n any event, the European
Communities is of the view that the Agreed Conclusions and the other UNCTAD texts cited by India do not
support India's position". The original arguments made in the EC's second written submission and in its reply toquestions from the Panel are related to the term "non-discriminatory" and to paragraph 2(a), rather than toparagraph 3(c). The first sentence of the proposed text stated "[t]he European Communities argues thatWT/DS246/R
Page 99
balanced assessment of the arguments made by the parties during the proceedings.  On the other hand,
the Panel considers it appropriate to make adjustments to paragraphs 7.71-7.73 so as to take note of
other relevant arguments made by the European Communities during the proceedings, which the
European Communities would like the Panel to set out in its Report.  Noting that some of the
arguments raised in the proposed texts are actually already covered by the text of paragraphs7.71-7.73 of the Interim Report, the Panel has made a few adjustments by adding certain elements of
the proposed text into those paragraphs.  The adjustments are now reflected in paragraphs 7.72-7.76
of this Report.  At the same time, the Panel has also made adjustments to paragraph 7.68 so as to set
out the corresponding counter arguments that India presented in the proceedings.
3. "Non-discriminatory" in footnote 3
6.10 The European Communities requested the Panel to replace paragraphs 7.118-7.120 of the
Interim Report with the following proposed text:
"The European Communities argues that, in addition to the neutral meaning invoked
by India, the word 'discriminate' has also a negative meaning. The full text of the
dictionary definition quoted by India is 'to make a distinction in the treatment of
different categories of people, or thing, esp. unjustly or prejudicially against the
people on grounds of race, colour, sex, social status, etc'.
235 Referring to numerous
definitions of authors and judicial decisions of international tribunals, the European
Communities maintains that, in a legal context, 'non-discriminatory' is not
synonymous with formally equal treatment. Rather, there is discrimination if equal
situations are treated unequally or if unequal situations are treated equally.236
For the European Communities, the term discrimination does not have a uniform
meaning throughout the WTO Agreement.  It notes the statement by the panel in
Canada – Pharmaceutical Patents  that the term 'discrimination' may have different
meanings in different WTO contexts.. For example, the meaning of discrimination
under Article III of GATT 1994 is different from the meaning of discrimination under
the chapeau to Article XX of GATT 1994.237
The European Communities maintains that the term 'non-discriminatory' must be
interpreted in the specific context of the Enabling Clause (and in particular of
paragraphs 2(a) and 3(c) and the term 'generalised' in footnote 3)238 and in the light of
its object and purpose.  Article I:1 of the GATT is concerned with providing equal
conditions of competition for imports of like products originating in all Members.  In
contrast, the Enabling Clause, like all Special and Differential Treatment provisions,
seeks to create unequal competitive conditions in order to respond to the specialneeds of developing countries.  Having regard to that objective, differentiating
between developing countries according to their development needs is no more
discriminatory than differentiating between developed and developing countries."
239
                                                                                                                                                                    
paragraph 3(c) supports contextually its interpretation of the term "non-discriminatory" in footnote 3".  Again,
this argument does not address the issue of the meaning of paragraph 3(c) but rather, it addresses the issue of the
meaning of "non-discriminatory".
235 (footnote original) First written submission of the European Communities, para. 66.
236 (footnote original) Reply of the European Communities to question No. 9 from the Panel to both
parties, paras. 31-32.
237 (footnote original) Reply of the European Communities to question No. 10 from the Panel to both
parties, paras. 38-40.
238 (footnote original) EC's reply to the Panel's question to both parties No. 9, para. 27.
239 (footnote original) EC's replies to the Panel's question to both parties No. 10 and EC's reply to the
Panel's question to the EC No. 15.WT/DS246/R
Page 100
Accordingly, the EC considers that, in order to establish whether the Drug
Arrangements are 'non-discriminatory' within the meaning of footnote 3, the Panel
should address the following two issues: firs t, the Panel should establish whether the
Drug Arrangements pursue an objective which is consistent with the object and
purpose of the Enabling Clause, and more specifically with the objective stated inParagraph 3(c); second, if so, the Panel should establish whether the Drug
Preferences constitute a reasonable means to achieve that objective
240, i.e. whether
they are both apt to achieve that objective and proportionate.241
The European Communities argues that the UNCTAD texts relied upon by India arenot context and in any event do not support India's position. They address the
threshold question of whether all developing countries should be recognised as
beneficiaries of the GSP, rather than the subsequent question of whether allrecognised beneficiaries should be granted identical preferences.  The first of these
questions is addressed by the term 'generalised', while the second is addressed by the
term 'non-discriminatory'.  India confuses the two issues and renders the term 'non-
discriminatory' redundant.
242"
6.11 India requested the Panel to reject the European Communities' request for the same reason as
described in paragraph 6.8, namely, that (i) the European Communities had not provided any reason
why it considered these paragraphs to be incomple te or inaccurate, and (ii) the purpose of such
summaries, in India's view, was not to set out all of the arguments presented by the parties, but to
define the issues to be analyzed by the Panel.  India contended that the mere fact that the summaries
prepared by the Panel did not reproduce all the arguments made by the parties did not render themincomplete.
6.12 The Panel considers that a number of the arguments in the EC's proposed texts are already
covered by paragraphs 7.118-7.120 of the Interim Report.  In the Panel's view, there is no requirement
that a Panel use the language that a party prefers to summarize its arguments unless the Panel's
summary is inaccurate or incomplete as to the mean ing of these arguments as originally made in the
proceedings.  The European Communities has not indicated whether the cited paragraphs contain
inaccuracies or are incomplete, and where in these paragraphs such inaccuracies or incompleteness is
to be found.  Although the evaluation of the "complet eness" of such summaries of parties' arguments
depends upon the relevance of various arguments to the Panel's analysis of a relevant issue, the Panel
could, in exercising its discretion, set out more arguments that a party would like the Panel to include,
provided the Report would also set out the corres ponding counter arguments made by the other party
during the proceedings, so as to allow for an objective assessment.  With this in mind, the Panel hasmade adjustments to paragraphs 7.118-7.120 of its Interim Report by adding certain elements of the
proposed text into those paragraphs, as reflected in paragraphs 7.122-7.125 of the Report.
Accordingly, the Panel also made adjustments to  paragraph 7.117 of the Interim Report so as to
reflect the corresponding counter arguments that India made during the proceedings, as reflected in
paragraphs 7.120-7.121 of the Report.
4. Paragraph 2(a)
6.13 The European Communities requested that the Panel replace paragraphs 7.160-7.161 with the
following text:
                                                     
240 (footnote original) EC's reply to the Panel's question to both parties No. 9., para. 32.
241 (footnote original) EC's reply to the Panel's question to both parties No. 32, para. 5.
242 (footnote original) EC's second written submission , para. 38.  EC's reply to the Panel's question to
both parties No. 52, para. 57. EC's comment on India's reply to the Questions to India No. 16.WT/DS246/R
Page 101
"The European Communities, in contrast, argues that India's interpretation of
'developing countries' under paragraph 2(a) as meaning 'all developing countries'
would render redundant the terms 'generalised' and 'non-discriminatory' in footnote 3.
Also, according to the European Communities, India's interpretation would mean that
the objective of paragraph 3(c) of responding positively to the development, financialand trade needs of developing countries could not be achieved.
243"
6.14 For the same reason as set out earlier, instead of replacing the whole paragraph with the EC's
proposed text, the Panel has made an adjustment to paragraph 7.160 of its Interim Report which is
reflected in paragraph 7.165 of its Report.
5. Dissenting Opinion
6.15 India requested the dissenting member of the Panel to delete those parts of the dissenting
opinion based on the assumption that India abandoned its claims with respect to paragraph 2(a) of theEnabling Clause, which in India's view, is an incorrect assumption. Citing paragraph 9.20 of the
Interim Report, which states "[i]n arguing that the Enabling Clause is an affirmative defence, India
must admit that it is not a claim and its reference to the Enabling Clause is an argument in response to
an anticipated defence", India argued that  this assertion failed to distinguish between the substantive
legal claims and the procedural arguments that it presented in relation to the allocation of burden ofproof.  In India's view, a complainant presenting the procedural argument that the duty to invoke a
provision and the burden of proof falls on the defendant did not thereby amount to a withdrawal of its
substantive claim with respect to that provision.  To put it in another way,  India's argument that
paragraph 2(a) of the Enabling Clause provided the European Communities with an affirmative
defence did not imply that it was requesting the Panel not to rule on that provision in case suchargument was not accepted.
6.16 India argued that, in fact, India clearly made the claim that the Drug Arrangements did not
meet the requirements set out in paragraph 2(a) of the Enabling Clause, in its request for the
establishment of the Panel, and it continued to make the claim during the proceedings and submitted
the necessary evidence to support that claim.
244  India also argued that paragraph 48 of its second
written submission states:  "India's claim in these proceedings, as expressed in its first written
submission, is based on Article I:1 of the GATT and not on paragraph 2(a) of the Enabling Clause.
Paragraph 2(a) of the Enabling Clause is therefore not a material element of India's claim".  This
statement when read in its context did not communicat e that India no longer sought a ruling in respect
of this provision.  The purpose of this statement was to present the argument that, given that
paragraph 2(a) of the Enabling Clause was an affirmative defence, it was not up to India but up to the
European Communities to assert and prove that the Drug Arrangements were consistent with thatprovision.
6.17 India also argued that in all previous cases where panels rejected the complainants' argument
that a particular provision constituted a defence,  the panels nevertheless examined the complaint in
light of that particular provision.  Refusal to conduct the examination would result in the situation
where the complainant would have to re-submit its case to a new panel, which would run counter to
the objective of the DSU of prompt settlement of disputes, as provided in Article 3.3 thereof.  It was
                                                     
243 (footnote original) Reply of the European Communities to question No. 9 from the Panel to both
parties;  Second written submission of the European Communities, para. 16.
244 India cited paragraphs. 24-26 of its Oral Statement at the Second meeting of the Panel to show that
it has made a claim and provided evidence under the Enabli ng Clause during the proceedings:  "The issue of the
allocation of burden of proof has been rendered unnecessar ily complex in the present case. ... As stated in India's
second written submission, the following factual elements are not disputed …  In India's view, these are the only
material facts that need to be established to sustain a finding that the Drug Arrangements are inconsistent with
Article I:1 of the GATT 1994 and are not justified under the Enabling Clause.  Therefore, the Panel need noteven delve into the issue of allocation of burden of proof".WT/DS246/R
Page 102
also India's view that without seeking the parties' clarification on the scope of India's claim during the
proceedings, the legal approach used was not compatible with the basic principle of due process.
6.18 The European Communities commented that although India's panel request mentioned some
provisions of the Enabling Clause in rather ambiguous terms, India chose not to assert any claim
under that Enabling Clause in its first written submission.  Instead, India limited itself to respond tothe "affirmative defence" which it anticipated would be raised be the European Communities under
the Enabling Clause.  Subsequently, India clarified several times in unequivocal terms that it was not
making any claim under the Enabling Clause.  The European Communities cited India's reply to
question number 5 from the Panel to both parties,  paragraph 48 of India's second written submission
and India's second oral statement to demonstrate such fact.  The European Communities argued that
India could not use the interim review as an oppor tunity to correct the consequences of its own
previous act.  In the European Communities' view, there was no reason for the dissenting panelist tomodify the dissenting opinion.
6.19 The dissenting member of the Panel considers that India's theory and claim are accurately
described in paragraph 4.169 of this Report as follows:  "India's claim in these proceedings, as
expressed in its first written submission, is based on Article I:1 of GATT 1994 and not on paragraph
2(a) of the Enabling Clause.  Paragraph 2(a) of the Enabling Clause is therefore not a material elementof India's claim.  To defeat India's claim, the European Communities may assert, and it has chosen to
so assert, that the tariff preferences under the Drug Arrangements are justified under the Enabling
Clause.  It is thus incumbent on the European Communities to prove the affirmative of its defence –
that the Drug Arrangements are in fact covered by that Clause."  This theory was repeated by India,
e.g., in its executive summary of its first written submission
245 and in its second written submission.246
The theory coincided with India's argument th at the European Communities bore the burden of
proof.247  India's written and oral statements to the Panel and to the participants in the proceedings
voluntarily clarified the meaning of the language of the terms of reference and narrowed the claim to
be considered by the Panel248, and defended against by the European Communities.
6.20 In the dissenting panelist's view, the burden of proof is a distinct legal issue.  India argued
consistently that the European Communities could not mount a successful defence under the Enabling
Clause and that the European Communities bore the burden of proof.  While the defence and the
burden of proof are related to the claim procedurally, neither can determine the claim.
6.21 On India's remarks in paragraph 9 of its Comments that a procedural argument by a
complainant about the respondent's duty to invoke a provision ( e.g., the Enabling Clause) and about
the burden of proof does not withdraw a substantive claim about that provision, the dissenting panelist
is of the view that India seems to argue that the Enabling Clause is both its claim and the EuropeanCommunities' defence.  However, as the dissenting panelist understands, that was not its argument
before this Panel as explained above and was not the situation in US –Wool Shirts and Blouses , where
India had made a claim under Article 6 of the Agreement on Textiles and Clothing.
                                                     
245 Paragraph 20 categorically states that the Enabling Clause "constitutes an affirmative defence that
the EC might invoke to justify an inconsistency with Article I:1 of the GATT."  In paragraph 21, India explainedthat for the "sake of procedural efficiency" it presented its views on this issue.
246 Paragraph 7 refers to  "India’s claim under Article I of the GATT… [and] … the EC’s defence
under paragraph 2(a) [of] the Enabling Clause".
247 See, e.g., paragraph 25 of the second oral statement of India (8 July 2003) for a statement of India's
theory regarding claim and burden of proof.
248 In a different context, the Appellate Body cautioned panels against introducing concepts into a
WTO agreement that are simply not there.  Appellate Body Report, India – Patents (US) .  Here, the argument
made by India in its comments was not there during the Panel proceedings.WT/DS246/R
Page 103
6.22 Based on these reasons, the dissenting member of the Panel sees no reason to make any
change to the Dissenting Opinion.  The Panel, however, has inserted a footnote to paragraph 7.54 on a
related point.
VII. FINDINGS
A. PROCEDURAL ISSUES
7.1 In this case, two procedural issues have been raised.  The first relates to a request by certain
third parties for enhanced rights of participation in  the panel proceedings.  The Panel issued its ruling
on this matter on 17 April 2003, granting enhanced third-party rights to all third parties in this dispute.
The decision is reproduced as Annex A to this report.
7.2 The second procedural issue relates to a matter raised by the European Communities
concerning the joint representation of India and Paraguay by the ACWL.  The Panel will now
examine this issue.
1. Joint representation of India and Paraguay
(a) Introduction
7.3 The Panel recalls that on 14 May 2003, at the first substantive meeting with the parties, the
European Communities raised certain procedural issues concerning the joint representation of India
and Paraguay by the ACWL.  Specifically, the European Communities raised issues of:  (i) potentialconflict of interest;  (ii) incompatibility with the DSU rules on confidentiality;  and (iii) blurring the
distinction between the main parties and third parties.  The European Communities requested that the
Panel clarify whether, as a matter of principle, the same legal counsel could represent simultaneously
a complaining party and a third party and, if so, under what conditions.  The European Communities
also requested that, if the Panel considered that in principle the same counsel could representsimultaneously a party and a third party under certain conditions, the Panel should then examine
whether the conditions for such simultaneous representation were satisfied in this case.
7.4 The Panel further recalls that on the same date, in response to the European Communities'
request to the Panel, India and Paraguay submitted a Joint Statement, indicating that:  (i) India and
Paraguay each had full notice of the representation of the other by the ACWL;  (ii) both India andParaguay considered that, by representing both India and Paraguay, the ACWL did not compromise
their individual interests in effective legal representation;  (iii) India and Paraguay consented to
simultaneous representation by the ACWL in this dispute;  (iv) the issue of exchange of information
between parties and third parties did not arise in the present case because third parties were accorded
enhanced rights;  and (v) the European Communities' request that the Panel rule on a matter of legal
ethics lacked any legal basis.  The above-referenced Joint Statement was followed by letters to the
Panel from India and Paraguay, both dated 28 May 2003, restating India's and Paraguay's positions onthis matter.
7.5 In addressing this set of procedural issues, the Panel first notes that the WTO has not itself
elaborated any rules governing the ethical conduct of legal counsel representing WTO Members in
particular disputes.  Accordingly, the Panel considers there are no directly applicable legal provisions
or guidelines to which it can have reference in order to resolve any issues raised in respect of the joint
representation of a party and a third party.
7.6 Second, the Panel is not aware of any previous GATT or WTO case in which a panel or the
Appellate Body has addressed the type of conflict of interest issue raised by the European
Communities in the present dispute.WT/DS246/R
Page 104
7.7 Third, whereas in two earlier pro ceedings before the Appellate Body249, the issues of
confidentiality and of measures necessary to maintain such confidentiality were addressed, the Panel
considers that the factual settings and the rulings in those earlier cases are not apposite to the issues
raised by the European Communities in this proceeding.
7.8 The Panel nonetheless considers that, flowing from its terms of reference and from the
requirement, in Article 11 of the DSU, to "make an objective assessment of the matter before it … ",
as well as the requirement, pursuant to Article 12 of the DSU, to determine and administer its
Working Procedures, the Panel has the inherent authority – and, indeed, the duty – to manage the
proceeding in a manner guaranteeing due process to all parties involved in the proceeding and to
maintain the integrity of the dispute settlement system .  With specific reference to issues raised in the
instant case, it is incumbent on the Panel to clarify whether the ACWL's joint representation of India
and Paraguay poses any ethical concerns of the kind raised by the European Communities.  At thesame time, and although the European Communities asks the Panel for a ruling whether, as a matter of
principle, the same legal counsel can represent simultaneously a party and a third party and, if so,
under what conditions, the Panel considers that it cannot rule on such issues in the abstract, but only
as they relate to the specific case before it.
(b) Conflict of interest
7.9 As a general matter, the Panel considers that it is the responsibility of legal counsel to ensure
that it is not placing itself in a position of actual or potential conflict of interest when agreeing to
represent, and thereafter representing, one or more WTO Members in a dispute under the DSU.  In
this regard, the Panel notes that bar associations in many jurisdictions have elaborated rules of
conduct dealing explicitly with conflicts of interest through joint representation.
250
7.10 Common to all such ethical rules of conduct is the principle that counsel shall not accept or
continue representation of more than one client in a matter in which the interests of the clients actually
or potentially conflict.  Underlying this principle is the fundamental notion that a client must have full
confidence in the objectivity and independence of the professional advice provided to it by counsel.
A second common element to all such ethical rules, however, is the possibility for clients, when facedwith counsel being subject to actual or poten tial conflict of interest as the result of joint
representation, to consent to such joint representation, but only following full disclosure by counsel.
In other words, following disclosure of the actual or potential conflict of interest, clients may waive
such conflict.  Yet a third common element is that counsel shall nevertheless discontinue such joint
representation at such time as counsel becomes aware that the interests of the two (or more) clients are
directly adverse.
7.11 The Panel considers that the above-described common elements to ethical rules of conduct in
many jurisdictions are equally appropriate to dealing with issues of representational conflict of
interest in the WTO dispute settlement context.
7.12 The Panel agrees with India and Paraguay that the parties most likely to be concerned by any
potential or actual conflict of interest are those agreeing to joint representation, here India and
Paraguay.  It would seem that the basis for raising concerns over such joint representation would beconsiderably less for other parties in the case, who would be unlikely to be prejudiced by any joint
                                                     
249 Appellate Body Report, Canada – Aircraft , para. 145;  Appellate Body Report, Thailand – H-
Beams , paras. 74-78.
250 See, e.g., American Bar Association, Model Rules of Professional Conduct, Rule 1.7;  State Bar of
California, Rules of Conduct, Rule 3-310;  New York State Bar Association, Lawyer's Code of Professional
Responsibility, DR 5-105;  Canadian Bar Association, C ode of Professional Conduct, Chapter V;  Law Society
of Upper Canada, Rules of Professional Conduct, Rule 2.04;  Council of the Bars and Law Societies of theEuropean Union, Code of Conduct for Lawyers in the European Union, Rules 3.2;  Barreau de Paris, Règlesprofessionnelles, Article 155;  Bar of England and Wales, Code of Conduct, Rules 603 and 608.WT/DS246/R
Page 105
representation of India and Paraguay.  While the Panel does not exclude that, in a different case, there
could be concerns of a more systemic nature, that could be raised by parties other than those agreeing
to joint representation, the Panel is of the view that the European Communities has not demonstrated
the existence of  a particular situation which gives rise to such concerns in the instant case.  The Panel
accordingly does not consider that it is faced with an issue of principle or one having systemicimplications for the WTO dispute settlement system.
7.13 As stated in the Introduction, India and Paraguay claim to have been fully informed about
their joint representation by the ACWL and have given their written consent to such joint
representation.  In these circumstances, the Panel considers that India and Paraguay, as well as
counsel for this party and third party, have done everything necessary to allow for the continued joint
representation of India and Paraguay by the ACWL.
(c) Confidentiality
7.14 On the issue of confidentiality between a party and its counsel, while noting that the European
Communities states that the problem is mitigated in  the instant case because of the enhanced rights
granted to third parties, the European Communities nonetheless maintains that the problem has not
been disposed of entirely and requests the Panel to  consider whether the ACWL's joint representation
of India and Paraguay may be inconsistent with DSU rules on confidentiality.
7.15 Although the European Communities does not specify which provision(s) of the DSU may be
of concern, the Panel considers that the most relevant DSU rule that could be implicated is
Article 18.2, whose first sentence states that "[w]ritt en submissions to the panel or the Appellate Body
shall be treated as confidential, but shall be made available to the parties to the dispute".  A related
rule is Article 14.1 of the DSU which provides that "[p]anel deliberations shall be confidential".Article 10 of the DSU and paragraph 12 of the Working Procedures, Appendix 3 to the DSU, which
set out steps of the panel's work, could also be implicated, as third parties are permitted limited
participation at various stages of panel proceedings, as compared to the parties.  In particular, third
parties are not provided the right to participate in the interim review process under either Article 10 or
the Working Procedures.  In the view of the Panel, Article 18.2 of the DSU would be the more typicaland relevant rule, where third parties only receive the first submissions of the parties to the Panel and
only participate in a single, special third-party session.
7.16 As a general matter, the Panel considers that Members involved in the dispute settlement
process have the obligation of ensuring confidentiality, as required by Article 18.2, Article 14.1
251 and
the Working Procedures, regardless of who serves as their legal counsel.  Needless to say, this
obligation of Members involved in the dispute settlement process must be respected by all of their
representatives, including legal counsel.  In addition, as a general professional discipline, it is theresponsibility of counsel to maintain the confidentiality of all communications between it and the
party (or third party) it represents.  In this regard, the Panel again notes that bar associations in many
jurisdictions have elaborated rules of conduct deal ing explicitly with confidentiality between clients
and their legal counsel.
252
7.17 In this dispute, India argues that the issue of confidentiality does not arise for India and
Paraguay because of the enhanced rights granted to all third parties.  On the other hand, the European
Communities responds that the problem is mitigated bu t not totally disposed of, as there is still the
                                                     
251 It could be argued that the Interim Report of a panel constitutes part of its "deliberations" before it is
finalized and issued to the parties.
252 See, e.g., American Bar Association, Model Rules of Professional Conduct, Rule 1.6;  New York
State Bar Association, Lawyer's Code of Professional  Responsibility, DR 4-101;  Canadian Bar Association,
Code of Professional Conduct, Chapter IV;  Law Society of Upper Canada, Rules of Professional Conduct,Rule 2.03;  Council of the Bars and Law Societies of the European Union, Code of Conduct for Lawyers in theEuropean Union, Rules 2.3;  Bar of England and Wales, Code of Conduct, Rules 603, 608 and 702.WT/DS246/R
Page 106
possibility of access to Panel documents, including the Interim Report by third party Paraguay, due to
the use of the same legal counsel.253  However, the Panel considers that due to the enhanced
third-party rights pursuant to which all third parties receive all submissions of the parties to the Panel
and participate in all meetings of the Panel with the parties, Paraguay was actually accorded the right
to share all submissions and Panel documents which were distributed before the end of the SecondSubstantive Meeting of the Panel.  After the Panel's Second Substantive Meeting, no third party was
given further enhanced right to participate in the process and, particularly, to influence the Panel's
Findings.  Paraguay has not gained any litigation advantage over other third parties in this dispute
through its use of the same legal counsel as India.  The Panel also notes that the European
Communities has not provided any argument or evidence  to indicate that in fact there is a disclosure
of confidential information, including the Interim Report of the Panel, to Paraguay due to the joint
representation of India and Paraguay by the same legal counsel.  Under such circumstances, the Panelfinds that the confidentiality issue has not arisen in this dispute.
(d) Blurring the distinction between parties and third parties
7.18 Whereas, in a procedurally more typical case, the joint representation of a party and a third
party could potentially raise issues related to the blurring of the distinction between parties and third
parties, the Panel considers that, as acknowledged by the European Communities
254, this issue does
not arise in the present case in view of the enhanced third-party rights accorded to all third parties.  In
these circumstances, the Panel does not consider it either necessary or appropriate to pronounce upon
the more general issue of blurring that could arise in a different case.
B. CLAIMS OF THE PARTIES
7.19 In this case, India claims that the Drug Arrangements of the European Communities are
inconsistent with Article I:1 of GATT 1994 and are not justified by the Enabling Clause.  India states
that should the European Communities invoke the Enabling Clause, the European Communities bears
the burden of establishing that the Drug Arrangements are justified under the Enabling Clause.  India
also claims that the European Communities fails to demonstrate that the Drug Arrangements are "non-
discriminatory" within the meaning of paragraph 2(a) of the Enabling Clause.  India further claimsthat the European Communities has not demonstrated that the Drug Arrangements are justifiable
under Article XX(b) of GATT 1994.
7.20 The European Communities claims that the Dr ug Arrangements fall within the scope of
paragraph 2(a) of the Enabling Clause and that the Enabling Clause excludes the application of
Article I:1 of GATT 1994.  The European Communities states that it is for India to demonstrate that
the Drug Arrangements are not consistent with paragraph 2(a) of the Enabling Clause.  Since India
has not claimed a violation of the Enabling Clause, the European Communities requests the Panel torefrain from examining whether the measure is consistent with the Enabling Clause.  Should the Panel
find that Article I:1 applies, and that the Drug Arrangements are inconsistent with that provision, the
European Communities requests the Panel to find that the Drug Arrangements are justified under
Article XX(b).
                                                     
253 Communication of the European Communities to the Panel on 4 June 2003.
254 The European Communities states that the problem of confidentiality of submissions and of panel
documents is mitigated by the fact that third parties have been granted enhanced rights.  See Communication of
the European Communities to the Panel on 16 May 2003.WT/DS246/R
Page 107
C. THE NATURE OF THE ENABLING CLAUSE AND ITS RELATIONSHIP TO ARTICLE  I:1 OF GATT 1994
1. Introduction
7.21 India emphasizes that its material claim is that the Drug Arrangements constitute a violation
of Article I:1 of GATT 1994, not a violation of th e Enabling Clause.  India notes that the European
Communities requested a waiver for its Drug Arrangements and failed to obtain it.  In thesecircumstances, India states that it had no knowle dge, prior to the Panel request, what provision or
provisions would be invoked to justify the Drug Arrangements.
255  India maintains that the Enabling
Clause allows WTO Members to derogate from the obligations under Article I:1.  The European
Communities may invoke the Enabling Clause to justify the inconsistency of its measure with
Article I:1 of GATT 1994.  As such, the Enabling Clause constitutes an affirmative defence.256
According to India, the European Communities bears the burden of proving that its measure isjustified under the Enabling Clause.  It is sufficient for India to make a prima facie case of violation ofArticle I:1 of GATT 1994.
7.22 The European Communities claims, however, that Article I:1 of GATT 1994 does not apply
to a measure covered by the Enabling Clause because the Enabling Clause excludes the operation of
Article I:1.
257  The European Communities considers that India bears the burden of establishing a
prima facie case of violation of the Enabling Clau se.  Since India limits its claim to violation of
Article I:1 of GATT 1994, the European Communities considers that India fails to meet that burden.
The European Communities therefore requests the Panel to dismiss India's Article I:1 claim and to
refrain from examining the consistency of the Drug Arrangements with the Enabling Clause.258
7.23 In order to determine whether the Panel should proceed with the examination of the
consistency of the Drug Arrangements with Article  I:1 of GATT 1994 or with the Enabling Clause, it
is necessary for the Panel to determine:  (i) whether Article I:1 of GATT 1994 applies to a measure
falling under the Enabling Clause;  (ii) whether it is sufficient for India to establish a claim of
violation of Article I:1 of GATT  1994;  and (iii) which party bears the burden of establishing
inconsistency or consistency of the European Communities' measure with the Enabling Clause.  The
Panel considers that the resolution of all these issues depends on the relationship between Article I:1of GATT 1994 and the Enabling Clause, which in turn depends on the correct characterization of the
nature of the Enabling Clause, namely, whether it is in the nature of a positive rule establishing
obligations or of an exception to Article I:1 of GATT 1994.  Accordingly, the Panel will proceed with
its analysis of the nature of the Enabling Clause and its relationship to Article I:1.
2. Arguments of the parties
7.24 The Panel recalls India's request for the establishment of this Panel in which India requests
the Panel to examine, inter alia , whether the Drug Arrangements and their application "are consistent
with Article I:1 of GATT 1994 and the requirements set out in paragraphs 2(a), 3(a) and 3(c) of the
Enabling Clause".
259   In its first written submission, India requests the Panel to find that the Drug
Arrangements are inconsistent with Article I:1 of GATT 1994 and not justified by the Enabling
Clause.260  India also argues that, even though it is unclear to India what the legal basis for the Drug
Arrangements is, it may reasonably be assumed that the European Communities will invoke the
                                                     
255 First written submission of India, para. 44.
256 First written submission of India, para. 43.
257 First written submission of the European Communities, para. 20.
258 Second oral statement of the European Communities, paras. 25 and 81.
259 WT/DS246/4.
260 First written submission of India, para. 67.WT/DS246/R
Page 108
Enabling Clause as a defence.  For the sake of procedural efficiency, India presents its views on the
Enabling Clause in its first written submission.261
7.25 In its second written submission, India indicates that its material claim is that the Drug
Arrangements violate Article I:1 and that paragraph 2(a) of the Enabling Clause is not a material
element of its claim.  India argues that, to defeat India's claim, the European Communities may assert,and it has chosen to assert, that the Drug Arrangements are justified under the Enabling Clause.
262  As
such, India maintains, the Enabling Clause constitutes an affirmative defence.263  India also argues
that paragraph 2(a) of the Enabling Clause is an affirmative defence because it has legal functions and
characteristics similar to other provisions of the GATT that the Appellate Body has recognized as
affirmative defences.264  While the Enabling Clause is not an essential element of India's claim, it is an
essential element of the European Communities' defence.265  In India's view, the European
Communities bears the burden of proving that its measure is consistent with the Enabling Clause.  It issufficient for India to make a prima facie case of violation of Article I:1 of GATT 1994.
7.26 India argues that the legal functions of the 1971 Waiver Decision and the Enabling Clause are
the same.  Specifically, according to India, both permit a developed country to provide preferential
tariff treatment to developing countries without acco rding such treatment to other developed countries
and the Enabling Clause is a renewal (and permanent embodiment) of the 1971 Decision, ascontemplated in paragraph (b) of that Decision.
266
7.27 India maintains that the Enabling Clause is an exception to Article I:1.  India refers to the
Black's Law Dictionary definition of that term:  "e xception is something that is excluded from a rule's
operation" and that "statutory exception is a provision in a statute exempting certain persons or
conduct from the statute's operation".267  Citing the Appellate Body ruling in US – Wool Shirts and
Blouses  that "Articles XX and XI:2(c)(i) are limited exceptions from obligations under certain other
provisions of GATT 1994, not positive rules establishing obligations in themselves" and the Appellate
Body's comments on Article XXIV in Turkey – Textiles , it concludes that in the same way that
Articles XI:2(c)(i), XX and XXIV are exceptions, the Enabling Clause is likewise an exception to
certain aspects of Article I:1 and could be invoked as a defence in a claim of violation of thatArticle.
268
7.28 India also argues that, although the European Communities asserts that the Enabling Clause
confers an autonomous right, it has not provided a definition of "autonomous right";  it merely asserts
the conclusion that the Enabling Clause is an autonomous right and not a derogation from Article I:1
of GATT 1994.269
7.29 The European Communities argues that the Enabling Clause is not a waiver but a sui generis
decision and that it is the main instrument for achieving one of the basic objectives and purposes ofthe WTO Agreement – special and differential treatment.  Citing the Appellate Body in Brazil –
Aircraft  to the effect that Article 27 of the SCM Agreement is not an affirmative defence, the
European Communities concludes that "special and differential treatment" cannot be characterized as
a mere "affirmative defence".  The European Communities insists that the Enabling Clause exists,
                                                     
261 First written submission of India, para. 44.
262 Second written submission of India, para. 48.
263 First written submission of India, para. 43.
264 First written submission of India, para. 52;  second written submission of India, para. 52.
265 Second oral statement of India, para. 25.
266 Reply of India to question No. 2 from the Panel to both parties
267 Second written submission of India, para. 62.
268 Second written submission of India, paras. 54-55.
269 Second written submission of India, para. 38.WT/DS246/R
Page 109
side-by-side, with GATT Article I:1 and that th e word "notwithstanding" in paragraph 1 of the
Enabling Clause excludes completely the application of Article I:1.270
7.30 The European Communities maintains that the fact that the Enabling Clause is not an
"affirmative defence" but an autonomous right has two important implications, namely, first, in order
to establish a violation of Article I:1 of GATT 1994, India must first establish that the DrugArrangements are not covered by paragraph 2(a) of the Enabling Clause;  and second, if the Drug
Arrangements are covered by the Enabling Clause, as the complaining party, India bears the burden of
proving that the Drug Arrangements are inconsistent with paragraph 3(c).
271
3. Panel's analysis
(a) Nature of the Enabling Clause
7.31 The Panel recognizes that the Enabling Clause is one of the most important instruments in the
GATT and the WTO providing special and more favourable treatment for the developing countries.The Panel has no doubt that WTO developing country Members often draw significant benefits from
the operation of GSP schemes of developed country Members.  The Panel is well aware that the
setting up of the GSP was greeted very positively by the GATT contracting parties as a whole.  With
the above in mind, the Panel considers that it is important to be particularly cautious in the
interpretation of its provisions.
7.32 The parties disagree on whether the nature of the Enabling Clause is that of a positive rule
setting out obligations or that of an exception.  In ex amining this issue, the Panel considers that it is a
common understanding that "exception" is a relative c oncept, in relation to the main rules of treaties,
that is, those positive rules that set out obligations.  In this regard, the Panel notes that the parties and
third parties all agree that the Enabling Clause is a part of GATT 1994 as one of the "other decisions
of the CONTRACTING PARTIES to GATT 1947" under paragraph 1(b)(iv) of GATT 1994.
272  As to
the means to be used in identifying the nature of the Enabling Clause, both India and the European
Communities also agree that it is necessary to examine its legal function in the context of the treaty as
a whole273, although they draw different conclusi ons after conducting their own analysis.
7.33 The Panel considers that the Enabling Clause forms a part of GATT 1994 and that in order to
identify whether it is a positive rule establishing obligations or of an exception, it is necessary to
examine its legal function in the context of the GATT 1994 as a whole.
7.34 The Panel also considers that a comparison of the legal function of the Enabling Clause with
that of established exceptions provisions in GATT 1994 is necessary because the result of the legal
characterization, in the Panel's view, should not be one that would undermine or otherwise adversely
affect the proper functioning of GATT 1994 as a whole.
7.35 The Panel recalls the Appellate Body ruling in US – Wool Shirts and Blouses , where the
Appellate Body stated that "Articles XX and XI:2 (c)(i) are limited exceptions from obligations under
certain other provisions of the GATT 1994, not positive rules establishing obligations in themselves".
To this Panel, it follows that the legal function of authorizing limited derogations from positive rules
establishing obligations is what is decisive in making Articles XX and XI:2(c)(i) exceptions.  In US –
Wool Shirts and Blouses , the Appellate Body effectively established two criteria for determining
                                                     
270 Replies of the European Communities to questions No s.2 and 3 from the Panel to both parties.  First
written submission of the European Communities, paras. 17-18.
271 First written submission of the European Communities, para. 19.
272 Reply of India to question No. 4 from the Panel to both parties;  reply of the European Communities
to question No. 4 from the Panel to both parties.
273 Reply of India to question No. 3 from the Panel to both parties;  reply of the European Communities
to question No. 3 from the Panel to both parties.WT/DS246/R
Page 110
whether a rule constitutes an "exception":  first, it must not be a rule establishing legal obligations in
itself;  and second, it must have the function of authorizing a limited derogation from one or more
positive rules laying down obligations.
7.36 The wording of the Enabling Clause is similar to that of Articles XX, XXI and XXIV.
Articles XX and XXI state "nothing in this Agreement shall be construed to prevent … ".Article XXIV:5 states "the provisions of this Agreement shall not prevent … ".  The Enabling Clause
provides "[n]otwithstanding the provisions of Article I of the General Agreement, contracting parties
may ...  ".  The ordinary meaning of "notwithstanding" is "in spite of, without regard to or prevention
by".
274  The meaning of each of these phrases is essentially the same, that of providing authorization
for deviation from certain rules establishing obligations.  Such deviations are not "prevented by" the
existence and the application of positive rules establishing obligations.  The use of a slightly different
expression in the Enabling Clause, standing alone, does not make the nature or legal function of theEnabling Clause different from that of Articles XX, XXI and XXIV because the language used in the
Enabling Clause is not substantively different from that used in these other provisions.
7.37 The Panel considers that Article I:1 of GATT 1994 is clearly a "positive rule establishing
obligations".  The obligations are for Members to accord to the like products of all Members,
immediately and unconditionally, any advantage relating to, inter alia , custom duties accorded to
products originating in any country.  Articles II , III and XI:1 of GATT 1994 are, similarly, positive
rules establishing obligations.  In contrast, it is well established that Article XX is not such a rule
establishing positive obligations, nor is Article XI:(2)(c)(i).  The Panel is of the view that
Articles XXI and XXIV are of the same nature as Article XX.  There is no legal obligation under
GATT 1994 requiring a Member, e.g., to take an Article XX measure, or to take a national securitymeasure, or to form a free-trade area or customs union with other Members.  Members are free to
choose either to take these measures or to do nothing.  If they decide to take such measures, they are
authorized to do so by these provisions, subject to certain conditions.  The fact that when Members
choose to take such measures, they are also require d to comply with certain conditions prescribed in
these exceptions provisions, such as those in the chapeau of Article XX and in paragraphs 5 and 8 ofArticle XXIV, does not change the basic "non-oblig atory" nature of these provisions.  These
conditions are only subsidiary obligations, dependent on the decision of the Member to take such
measures.  The existence of certain conditions relating to the application of an exception provision
only signifies that the exception is "limited", not ab solute, and that the authorization of derogation is
tied to the fulfilment of certain conditions.
7.38 The Panel considers that the legal function of the Enabling Clause is to authorize derogation
from Article I:1, a positive rule establishing obligations, so as to enable the developed countries,inter alia , to provide GSP to developing countries.  There is no legal obligation in the Enabling
Clause itself requiring the developed country Members to provide GSP to developing countries.  The
word "may" in paragraph 1 of the Enabling Clause makes the granting of GSP clearly an option  rather
than an obligation.  The Panel considers that this is also a limited  authorization of derogation in that
the GSP has to be "generalized, non-discriminatory and non-reciprocal".
7.39 From the above analysis, the Panel considers that the Enabling Clause meets the two criteria
that the Appellate Body established in US – Wool Shirts and Blouses  for determining whether a
particular provision is in the nature of an exception.  It functions similarly to other GATT 1994
provisions that the Appellate Body has characterized as exceptions.  Accordingly, the Panel finds that
the Enabling Clause is in the nature of an exception to Article I:1 of GATT 1994.
                                                     
274 The New Shorter Oxford English Dictionary , 4th Edition, p.  1947.WT/DS246/R
Page 111
(b) Burden of proof under the Enabling Clause
7.40 The Panel notes that there are a number of exceptions provisions in the GATT that a party
may invoke in order to justify an inconsistency with Article I:1.  A measure could well be for
achieving legitimate objectives such as those under Article XX or Articles XXI or XXIV, or the
Enabling Clause.  Given that the specific purpose for a measure may not be always expressly set outin the measure itself, it may be difficult for the complaining party to know precisely which legitimate
objective a measure is aimed to achieve.  In this dispute, the European Communities actually invokes
more than one objective and more than one legal ba sis for its measure, i.e., the Enabling Clause and
Article XX(b).  The Panel therefore considers that it is sufficient for India to demonstrate an
inconsistency with Article I:1.  It is not the task of India to establish further violations of possible
exceptions provisions that could justify the inconsistency of the European Communities' measure with
Article I:1.
7.41 To conclude otherwise could result in the situation where a complaining party could raise
claims unrelated to the defending party's justification for a particular measure.  Exceptions provisions
should, accordingly, be invoked and justified by the defending party.  For these reasons, the Panel
finds that it is for the European Communities to invoke one or more particular provisions, including
the Enabling Clause, as justification for the claimed inconsistency of its measure with Article I:1.
7.42 As the Appellate Body established in US – Wool Shirts and Blouses  and in Turkey – Textiles ,
exceptions provisions can be invoked as affirmative defences to justify an inconsistency of a measure
with positive rules setting out obligations.  As previously noted, the Appellate Body stated in US –
Wool Shirts and Blouses  that "Article XX and XI:(2)(c)(i) are limited exceptions from obligations
under certain other provisions of the GATT 1994, not positive rules establishing obligations inthemselves."  It went on to state that "[t]hey are in the nature of affirmative defences.  It is only
reasonable that the burden of establishing such a defence should rest on the Party asserting it".
275  In
Turkey – Textiles , the Appellate Body noted in a footnote that "legal scholars have long considered
Article XXIV to be an 'exception' or a possible 'defence' to claims of violation of GATT provisions".
At the same time, the Appellate Body stated:  "Thus, the chapeau [of paragraph 5 of Article XXIV]makes it clear that Article XXIV may, under certain conditions, justify the adoption of a measure
which is inconsistent with certain other GATT provisions, and may be invoked as a possible 'defence'
to a finding of inconsistency".
276  The Panel considers that these rulings confirm that if the European
Communities has recourse to the Enabling Clause as  a defence, it is for the European Communities:
(i) to raise the Enabling Clause as an affirmative defence to India's claim of violation of Article I:1;
and (ii) to demonstrate the measure's consistency with that provision.
(c) Applicability of Article I:1
7.43 As to whether or not Article I:1 applies to a measure covered by the Enabling Clause, the
Panel notes the European Communities' position that the Enabling Clause excludes the application of
Article I, as well as India's position that the Enabling Clause authorizes a derogation from obligations
under Article I:1 only to the extent necessary to implement GSP schemes, but does not exclude the
operation of Article I:1 altogether.  The Panel will examine this issue, taking into account the ordinarymeaning of the term "notwithstanding" in paragraph 1 of the Enabling Clause, as well as relevant
jurisprudence.
7.44 The ordinary meaning of "notwithstanding" in paragraph 1 of the Enabling Clause is "in spite
of, without regard to or prevention by".
277  The Panel understands this to mean that the operation of
the Enabling Clause is not prevented by Article I:1.  That is, the Enabling Clause takes precedence to
                                                     
275 Appellate Body Report, US – Wool Shirts and Blouses,  DSR 1997:1, 323, at 337.
276 Appellate Body Report, Turkey – Textiles , para. 45.
277 The New Shorter Oxford English Dictionary , 4th Edition, p.  1947.WT/DS246/R
Page 112
the extent of conflict between the two provisions.  In  any case, the dictionary definition itself is not
dispositive as to whether the Enabling Clause excludes the application of Article I:1.  Absent textual
support suggesting that the Enabling Clause excludes Article I:1 of GATT 1994, the Panel cannot
assume that this was the intent of contracting parties.278  In the view of the Panel, the relationship
between exceptions provisions and provisions se tting out basic GATT obligations is not one that
where the application of one provision excludes the application of the other.
7.45 Indeed, taking the example of the relationship between Article XX and Articles I, III or XI:1,
the jurisprudence demonstrates that the two apply concurrently to a given measure.  In US – Gasoline ,
US – Shrimp , Korea – Various Measures on Beef  and EC – Asbestos , panels and the Appellate Body
have consistently begun the examination of the consistency of the challenged measure with Articles I,
III or XI:1.  After finding violations under one of  these provisions, the panels and the Appellate Body
then went on to examine whether the measure could be justified under Article XX.279  T h e  s a m e
relationship also applies between Article XXIV and Article XI of GATT 1994.  In Turkey – Textiles ,
the panel also first examined the consistency of Turk ey's quantitative restrictions with Articles XI and
XIII of GATT 1994 and, after finding inconsistency with these, it proceeded to examine whether the
measure was justified by Article XXIV of GATT 19 94.  This order of examination is confirmed by
the Appellate Body where it "upholds the Panel's conclusion that Article XXIV does not allow Turkeyto adopt, upon the formation of the customs uni on with the European Communities, quantitative
restrictions on imports of 19 categories of textile and clothing products which were found to be
inconsistent with Articles XI and XIII of the GATT 1994 and Article 2.4 of the ATC".
280
Accordingly, the relationship between Article XX or Article XXIV, on the one hand, and Article I,
Article III or Article XI:1, on the other, is one where both categories of provisions apply concurrentlyto the same measure, but where, in the case of co nflict between these two categories of provisions,
Article XX or Article XXIV prevails.  The jurisprudence shows that there is no deviation from such a
relationship.  Had Article XX or Article XXIV excluded the application of Article I, Article III or
Article XI, panels and the Appellate Body would never have been able to examine various measures
under Article I, Article III or Article XI in all previous cases.  Similarly, it is clear to the Panel that, asan exception provision, the Enabling Clause applies concurrently with Article I:1 and takes
precedence to the extent of the conflict between the two provisions.
7.46 This prevailing status of the Enabling Clause over Article I:1 does not render Article I:1
inapplicable to a measure covered by the Enabling Clause.  In the Panel's view, to decide otherwise
would lead to an absurdity.  For example, Article I:1 requires non-discrimination in domestic taxation
                                                     
278 In many cases, the Appellate Body does not rely solely on the dictionary definitions of a term to
interpret the precise legal meaning of that term.  In Japan – Alcoholic Beverages II , when determining the
meaning of the term "like" in Article III:2 of GATT 1994, the Appellate Body stated that "there can be no oneprecise and absolute definition of what is 'like'".  The scope of likeness "must be determined by the particular
provision in which the term 'like' is encountered". Appellate Body Report, Japan – Alcoholic Beverages II ,
p.114.  Similarly, In EC – Asbestos , when addressing the meaning of the term "like" in Article III:4 of GATT
1994, the Appellate Body stated: "dictionary meanings leave many interpretive questions open".  Accordingly,the Appellate Body interpreted the term "like" by examining it in the relevant context of Article III:4 of GATT1994.  Appellate Body Report, EC – Asbestos , paras. 92-93.  In Canada – Aircraft , when analyzing the meaning
of "benefit" under Article 1.1 (b) of the SCM Agreement, the Appellate Body also stated that there are a number
of ordinary meanings for that term  and that "[t]hese definitions also confirm that the Panel correctly stated that
'the ordinary meaning of 'benefit' clearly encompasses some form of advantage.'  Clearly, however, dictionarymeanings leave many interpretive questions open".  Appellate Body Report, Canada – Aircraft , para. 153.  In
US – Offset Act (Byrd Amendment) , the Appellate Body stated that "[i]t should be remembered that dictionaries
are important guides to, not dispositive statements of, definitions of words appearing in agreements and legaldocuments".  Appellate Body Report, US – Offset Act (Byrd Amendment) , para. 248.
279 For instance, In US – Gasoline , that panel "proceeded to examine whether the aspect of the baseline
establishment methods found inconsistent with Article III:4 could … be justified under paragraph (b) ofArticle XX", para. 6.20.
280 Appellate Body Report, Turkey – Textiles , paras. 41 and 64.WT/DS246/R
Page 113
of imported products.  To say that Article I:1 does not apply to measures under the Enabling Clause
would mean that GSP imports from different deve loping countries could be subject to different
taxation levels in the importing country's domestic market.  Such a result was clearly not intended by
the drafters of the Enabling Clause.
(d) Relevant jurisprudence
7.47 The European Communities cites the Appellate Body ruling in Brazil – Aircraft  on Article 27
of the SCM Agreement, to the effect that Article 27, relating to special and differential treatment for
developing countries, is not an affirmative defence and that the burden is on the complaining party to
demonstrate that the obligation under Article 27.4 is not met by a developing country invoking that
provision.  By analogy, the European Communities argues that the Enabling Clause, as the core
instrument of special and more favourable treatment, should not be treated as an affirmative defence
but rather as an autonomous right, and that the burden of proof should be on the party claiming aviolation of this provision.
7.48 The Panel considers that the relationship between Article 3.1(a) and Article 27 of the SCM
Agreement is different from that between Article I:1 of GATT 1994 and the Enabling Clause or that
between Article III and Article XX of GATT 1994.  Article 27.2(b) clearly excludes the application to
developing countries of the prohibition on export subsidies in Article 3.1(a).  It provides:  "Theprohibition of paragraph 1(a) of Article 3 shall not apply to...  (b) other developing country Members
for a period of eight years from the date of entry into force of the WTO Agreement, subject to the
compliance with the provisions in paragraph 4".  Consequently, it would not be sufficient for a
complaining party to only claim and demonstrate a violation of Article 3.1(a) by a developing
country.  The complaining party would have to claim and demonstrate a violation of an applicableprovision governing export subsidies matters which, in the case of developing countries, is Article 27.
7.49 In contrast, the relationship between the Enabling Clause and Article I:1 is different.  As the
Panel found in paragraph 7.39, the Enabling Clause is an exception to Article I:1 and it does not
exclude the application of Article I:1 but prevails over Article I:1 to the extent of a conflict between
the two provisions.  In such circumstances, the complaining party can claim and demonstrate aviolation of Article I:1 and it is up to the defending pa rty to decide what provisions to invoke in order
to justify the inconsistency of its measure with Article I:1.  And, by doing so, the defending party is
invoking these provisions as affirmative defences and therefore bears the burden of proof for
justification under the invoked provisions.
7.50 The European Communities also refers to the Appellate Body Report in EC – Hormones ,
where the Appellate Body characterizes Article 3.3 of the SPS Agreement as an autonomous right,
rather than as an exception to Article 3.1, and concludes that the complaining parties bear the burdenof proof under Article 3.3.  The Panel notes that the underlying basis for this Appellate Body finding
is that Article 3.3 excludes the application of Article 3.1 of the SPS Agreement.  Where a Member has
projected for itself a higher level of sanitary prot ection than would be achieved by a measure based on
international standards, Article 3.3 applies and Article 3.1 does not apply at all.  SPS measures based
on international standards and those based on higher appropriate levels of protection may exist side-by-side.  The complaining party is required to claim and make a prima facie case, showing violation
of a relevant provision, either Article 3.3 or Article 3.1, not both.  Again, the Panel is of the view that
the relationship between Articles 3.1 and 3.3 of the SPS Agreement is different from that between
Article I:1 of GATT 1994 and the Enabling Clause, because the Enabling Clause does not exclude the
application of Article I:1, just as Articles XX and XXIV do not exclude the application of Articles I:1,III or XI:1 of GATT 1994.
7.51 The Panel is fully cognizant of the statement of the Appellate Body in EC – Hormones  that
merely describing a particular provision as an exception is not determinative of which party bears theWT/DS246/R
Page 114
burden of proof.281  The conclusion that a particular provision is in the nature of an exception has to
be a well-reasoned determination supported by an examination of the provision's legal function in
relation to positive rules establishing treaty obligations.  In the case before it, the Panel has provided a
detailed reasoning for its determination that the legal function of the Enabling Clause is that of an
exception to Article I:1of GATT 1994, without prejudice to its unquestioned importance as a meansof promoting the trade of developing country Members.
(e) Relevance of the importance of the policy objective pursued
7.52 The WTO Agreement contains multiple policy objectives and all of these objectives are
important.  As to the importance that a policy objective pursued may have for the characterization of a
provision as an exception/affirmative defence or a positive rule establishing obligations, the Panel
considers that the relative importance of policy objectives pursued is not decisive in determining
whether a provision is an exception or a positive rule.  For instance, a policy objective of conservingexhaustible natural resources pursued under Article XX(g), can well be linked directly with one of the
purposes and objectives of the WTO Agreement, that of "seeking both to protect and preserve the
environment", as set out in the Preamble to the WTO Agreement itself.  This does not change the
nature of Article XX as an exception provision in the GATT legal structure.  Similarly, even though
the policy objective of the Enabling Clause does reflect one of the basic purposes and objectives ofthe WTO Agreement, this fact does not change its legal function as an exception to Article I of GATT
1994.  Likewise, the characterization of a particular provision as an exception does not diminish the
importance of the policy objectives pursued by that provision.  Indeed, the Panel well acknowledges
the critical importance of the policy objectives pursued by the Enabling Clause.  The Enabling Clause
reflects a great effort on the part of both developing and developed countries to rebalance andimprove trade benefits for developing countries through a carefully negotiated agreement that permits
certain types of special and more favourable treatment.  The Panel also notes that the importance of
the protection of human life and health pursued under Article XX(b) is in no way reduced by the
characterization of Article XX as an exception.
4. Summary of findings on the nature of the Enabling Clause and its relationship to
Article I:1
7.53 In light of the above, the Panel finds that:  (i) the Enabling Clause is an exception to
Article I:1 of GATT 1994;  (ii) the Enabling Clause does not exclude the applicability of Article I:1
but, rather, Article I:1 and the Enabling Clause apply concurrently, with the Enabling Clause
prevailing to the extent of inconsistency between the two provisions;  (iii) India bears the burden of
claiming and demonstrating the inconsistency of the Drug Arrangements with Article I:1 of GATT
1994;  and (iv) the European Communities bears the burden of invoking the Enabling Clause andjustifying its Drug Arrangements under that provision.  Therefore, it is sufficient for India to claim
and make a prima facie showing of violation of Article I:1.
7.54 Having found that Article I:1 applies to the Drug Arrangements concurrently with the
Enabling Clause and considering that India has made a claim and arguments under Article I:1, the
Panel considers it appropriate to examine India's Article I:1 claim.  Having found that the EuropeanCommunities bears the burden of demonstrating that the Drug Arrangements are justified by the
Enabling Clause, the Panel considers that the fact India has not made a material claim under the
Enabling Clause
282 does not prevent the Panel from further examining whether the measure is justified
under the Enabling Clause so long as the Enabling Clause is actually invoked by the defending party,
                                                     
281 Appellate Body Report, EC – Hormones , para. 104.
282 The Panel recalls India's argument that the Enabling Clause is not an essential element of India's
claim under Article I:1, but it is an essential element of the European Communities' defence.  Second oralstatement of India, para. 25.WT/DS246/R
Page 115
which is the case in this dispute.283  Accordingly, the Panel will proceed to examine India's claim that
the Drug Arrangements are inconsistent with Article I:1.
D. WHETHER THE DRUG ARRANGEMENTS ARE INCONSISTENT WITH ARTICLE  I:1
7.55 The Panel recalls India's claim that the tariff preferences granted under the Drug
Arrangements are inconsistent with Article I:1 of GATT 1994.  India argues that the MFN principleembodied in Article I:1 requires that advantages related to customs duties be extended to all other
Members and that the extension be immediate and unconditional.  In India's view, the term
"unconditionally" in Article I:1 means that any such advantage must be accorded to like products of
all other Members regardless of their situation or conduct.
284
7.56  The Panel further recalls the European Communities' position that the Enabling Clause
excludes the application of Article I:1.  In any case, the European Communities posits a different
understanding of "unconditionally" in Article I:1.  The European Communities' position is that"unconditionally" in Article I:1 means that any advantage granted may not be subject to conditions
requiring compensation.
285  The Drug Arrangements are not conditional, according to the European
Communities, because the beneficiaries are not required to provide any compensation to the European
Communities.286
7.57 As the Panel understands it, the following facts are not in dispute:  (i) the Drug Arrangements,
as prescribed in the current Council Regulation (EC) No.  2501/2001287, provide lower tariff rates than
the MFN bound rates on certain products;  and (ii) the treatment of lower tariff rates is only accorded
to products originating in 12 beneficiary Members, not to like products originating in other Members.
7.58 Article I:1 requires that with respect to custom duties, any advantages granted to any product
originating in any one Member shall be accord ed immediately and unconditionally to the like
products originating in all other Members.  The fact is clear that the tariff preferences granted by the
European Communities to the products originating in the 12 beneficiary countries are not accorded to
the like products originating in all other Me mbers, including those originating in India.
7.59 In the Panel's view, moreover, the term "unconditionally" in Article I:1 has a broader meaning
than simply that of not requiring compensa tion.  While the Panel acknowledges the European
Communities' argument that conditionality in the context of traditional MFN clauses in bilateral
treaties may relate to conditions of trade compensation for receiving MFN treatment, the Panel does
not consider this to be the full meaning of "unconditionally" under Article I:1.  Rather, the Panel sees
no reason not to give that term its ordinary meaning under Article I:1, that is, "not limited by or
subject to any conditions".288
7.60 Because the tariff preferences under the Drug Arrangements are accorded only on the
condition that the receiving countries are experiencing a certain gravity of drug problems, these tariffpreferences are not accorded "unconditionally" to the like products originating in all other WTO
Members, as required by Article I:1.  The Panel therefore finds that the tariff advantages under the
Drug Arrangements are not consistent with Article I:1 of GATT 1994.
                                                     
283 In paragraph 4 of its first written submission, the European Communities states:  "The Drug
Arrangements are granted in conformity with the 1979 Decision on Differential and More Favorable Treatment,Reciprocity and Fuller Participation of Developing Countries".
284 Executive summary of India's first written submission, paras. 9-13, 27 and 34.
285 Executive summary of the European Communities' first written submission, paras. 14-21.
286 Executive summary of the European Communities' second written submission, para. 14.
287 Exhibit India-6.
288 The New Shorter Oxford English Dictionary , 4th Edition, p.  3465.WT/DS246/R
Page 116
E. WHETHER THE DRUG ARRANGEMENTS ARE JUSTIFIED UNDER THE ENABLING CLAUSE
1. Introduction
7.61 Even though the parties disagree as to which of them should invoke the Enabling Clause and
which should bear the burden of demonstrating consistency/inconsistency of the measure with the
Enabling Clause, the Panel notes that both parties have made claims and arguments in relation to thejustification of the measure under the Enabling Clause.  The European Communities has effectively
invoked the Enabling Clause by arguing that the Drug Arrangements are consistent with the Enabling
Clause.
289  Bearing in mind its finding that it is for the European Communities to invoke the Enabling
Clause and to demonstrate consistency of its measure with that provision, and having found that the
Drug Arrangements are inconsistent with Article I:1 of GATT 1994, the Panel will proceed to
examine whether the measure is justified  under the Enabling Clause.
7.62 Prior to entering into this detailed analysis, the Panel considers it useful to set out the text of
the relevant portions of the Enabling Clause, as well as provide a brief description of the origins of
this instrument.
7.63 The relevant text of the Enabling Clause provides:
"1. Notwithstanding the provisions of Article I of the General Agreement,
contracting parties may accord differential and more favourable treatment todeveloping countries
1, without according such treatment to other contracting parties.
2. The provisions of paragraph 1 apply to the following:2
(a) Preferential tariff treatment accorded by developed contracting
parties to products originating in deve loping countries in accordance with the
Generalized System of Preferences,3
(b) Differential and more favourable treatment with respect to the
provisions of the General Agreement concerning non-tariff measures governed by the
provisions of instruments multilaterally negotiated under the auspices of the GATT;
(c) Regional or global arrangements entered into amongst less-developed
contracting parties for the mutual reduction or elimination of tariffs and, inaccordance with criteria or conditions which may be prescribed by the
CONTRACTING PARTIES, for the mutual reduction or elimination of non-tariff
measures, on products imported from one another
(d) Special treatment of the least developed among the developing
countries in the context of any general or specific measures in favour of developing
countries.
3. Any differential and more favourable treatment provided under this clause:
(a) shall be designed to facilitate and promote the trade of developing
countries and not to raise barriers to or create undue difficulties for the trade of any
other contracting parties;
                                                     
289 First written submission of the European Communities, para. 4:  "The Drug Arrangements are
granted in conformity with … the Enabling Clause".WT/DS246/R
Page 117
(b) shall not constitute an impediment to the reduction or elimination of
tariffs and other restrictions to trade on a most-favoured-nation basis;
(c) shall in the case of such treatment accorded by developed contracting
parties to developing countries be designed and, if necessary, modified, to respond
positively to the development, financial and trade needs of developing countries".290
1 (footnote original) The words "developing countries" as used in this text are to be
understood to refer also to developing territories.
2 (footnote original) It would remain open for the CONTRACTING PARTIES to
consider on an ad hoc basis under the GATT provisions for joint action any proposals for
differential and more favourable treatment not falling within the scope of this paragraph.
3 (footnote original) As described in the Decision of the CONTRACTING PARTIES
of 25 June 1971, relating to the establishment of "generalized, non-reciprocal and nondiscriminatory preferences beneficial to the developing countries" (BISD 18S/24)
7.64 The Generalized System of Preferences ("GSP") has its origins in discussions that took place
in the First Session of UNCTAD during the mid-1960s, as reflected in General Principle Eight and
Recommendation A.II.1 in the Final Act of the First Session of UNCTAD.  During the Second
Session of UNCTAD, on 26 March 1968, a Resolution was adopted on "Expansion and
Diversification of Exports of Manufactures a nd Semi-manufactures of Developing Countries"
(Resolution 21(II)).  In this Resolution, UNCTAD agreed to "the early establishment of a mutuallyacceptable system of generalized, non-reciprocal and non-discriminatory preferences which would be
beneficial to the developing countries" and established a Special Committee on Preferences as a
subsidiary organ of the Trade and Development Board, with a mandate to settle the details of the GSP
arrangements.  In 1970, UNCTAD's Special Committee on Preferences adopted Agreed Conclusions
which set up the agreed details of the GSP arrangement.  UNCTAD's Trade and Development Boardtook note of these Agreed Conclusions on 13 October 1970.  In accordance with the Agreed
Conclusions, certain developed GATT contracting parties sought a waiver for the GSP from the
GATT Council.  The GATT granted a 10-year waiver on 25 June 1971.  Before the expiry of this
waiver, the CONTRACTING PARTIES adopted a de cision on "Differential and More Favourable
Treatment, Reciprocity and Fuller Participation of Developing Countries" (the "Enabling Clause") on28 November 1979.
7.65 The main issue disputed by the parties is whether the Drug Arrangements are consistent with
paragraph 2(a) of the Enabling Clause, particularly the requirement of "non-discriminatory" in
footnote 3 to this subparagraph.  The interpretation of paragraph 2(a) and footnote 3 in turn depends
upon the proper understanding of paragraph 3(c) in that the latter is an important context for
paragraph 2(a).  It is only possible to give a full meaning to paragraph 2(a) and footnote 3 after
determining whether paragraph 3(c) allows differentiation among developing countries in"respond[ing] positively to the development, financial and trade needs of developing countries".
291
Accordingly, in order to determin e whether the term "non-discriminatory" in footnote 3 is affected by
the meaning of paragraph 3(c), the Panel will proceed, first, with the interpretation of paragraph 3(c).
                                                     
290 L/4903, BISD 26S/203-205.
291 The European Communities argues that "if the term 'non-discriminatory' was interpreted as
prohibiting any difference in treatment between developing countries, developed countries would be effectivelyprecluded from responding positively to those needs, thus rendering a nullity the requirement set forth inparagraph 3(c)".  First written submission of the European Communities, para. 71.WT/DS246/R
Page 118
2. Paragraph 3(c)
(a) Arguments of the parties
7.66 India argues that paragraph 3(c) requires that developed countries "respond positively" to the
development, financial and trade needs of developing counties by ensuring that the product coverage
and depth of tariff cuts are of a nature and magnitude that respond to the development, financial andtrade needs of developing countries as a whole, not individually or in terms of sub-groups.
292
According to India, the preferential tariff treatment must be applied without discrimination to likeproducts originating in all developing countries.
293  India maintains that, through ensuring sufficient
breadth of product coverage and depth of tariff cuts, developed countries are able to address the needs
of individual developing countries.294
7.67 In India's view, there is nothing in the Enabling Clause that allows a developed country
unilaterally to modify its scheme to take certain products off the scheme for individual developingcountries.
295  The issue whether a developed country can take individual countries off the scheme
altogether, India states, is an issue related to  the concept of "beneficiaries" in the "Agreed
Conclusions", which is not an issue in this dispute and need not be decided by the Panel.296  In any
case, it is India's view that preference-giving countries do not have a legal right to exclude any
country claiming developing country status.297
7.68 India argues that the phrase "development, financial and trade needs" in paragraph 3(c) has to
be considered in a comprehensive manner, as the conjunctive "and" has a different meaning from that
of "or".298  India goes on to say that paragraph 3(c) does not permit discrimination between
developing countries.  Rather, it merely mandates that "any differential and more favourable treatment
… shall respond positively to … the needs of [the] developing countries".  India points out that theFrench and Spanish versions of the Enabling Clause both use the article "the" before "developing
countries".  India posits that this means the category as a whole.  India considers that when the
drafters wanted to mean "individual … needs", they used the word "individual" expressly, such as in
paragraph 5.  In India's view, it was always the intention of the drafters that the benefits of GSP
schemes be extended, without discrimination, to all developing countries.
299  Should paragraph 3(c)
mandate that developed countries respond to the needs of individual  developing countries, as
suggested by the European Communities, then, India argues, a logical conclusion would be that a GSP
scheme which eliminates all duties on products from all developing countries would be inconsistent
with paragraph 3(c), as it would not respond to the different levels of individual  needs of developing
countries. Such interpretation would render GSP schemes which do not provide differentiation among
developing countries illegal, an obviously perverse result.300
7.69 On the status of the Agreed Conclusions in relation to the Enabling Clause, India argues that
the Enabling Clause incorporated the Agreed Conclusions through the 1971 Waiver Decision and that,
therefore,  the Agreed Conclusions are part of the terms of the Enabling Clause, because they were
agreed by consensus in UNCTAD and the 1971 Waiver Decision refers to the mutually acceptable
                                                     
292 Reply of India to question No. 47 from the Panel to both parties;  second written submission of
India, para. 105.
293 Reply of India to question No. 12 from the Panel to both parties.
294 Second written submission of India, para. 105;  second oral statement of India, para. 13.
295 Reply of India to question No. 14 from the Panel to both parties.
296 Reply of India to question No. 14 from the Panel to both parties.
297 Reply of India to question No. 18 from the Panel to both parties.
298 Reply of India to question No. 16 from the Panel to both parties;  second written submission of
India, paras. 106-112
299 Reply of India to question No. 19 from the Panel to both parties;  second written submission of
India, para. 104.
300 Second written submission of India, paras. 109-112.WT/DS246/R
Page 119
arrangement drawn up at UNCTAD.  The Enabling Clause, in turn, incorporated the 1971 Waiver
Decision by footnote 3.301
7.70 The European Communities, in contrast, argues that paragraph 3(c) permits developed
countries to respond to the development needs of individual developing countries according to
"objective criteria".302  The European Communities maintains that this does not mean that any
difference related to development needs should be taken into account;  in the European Communities'
view, this would be an impossible task.  Rather, the European Communities proposes two criteria for
responding to the development needs in a "non-discriminatory" manner:  (i) the difference in
treatment must pursue a legitimate aim;  and (ii) the difference in treatment must be a reasonable
means to achieve that aim.  The Drug Arrangements, according to the European Communities, meet
these criteria.303
7.71 The European Communities argues that, in designing GSP schemes, it is reasonable to take
into account all relevant needs, including the individual needs of each country, as well as those which
are common to all or to certain sub-categories of developing countries, but paragraph 3(c) does not
require taking into account each developing country's special needs.  In the European Communities'
view, the argument that preferences must apply equally to all like products originating in all
developing countries has no basis in paragraph 3(c) and stems from a wrong interpretation of footnote3.
304
7.72 The European Communities argues that  India's view that paragraph 3(c) only permits taking
into account the needs of all the developing countries in general, and not their individual interests, is
not supported by the text since the term "developing countries" is not preceded by qualifying terms
which might suggest that only collective needs of the developing countries must be taken intoaccount.  The omission of  the term "individual" or "particular", the European Communities believes,
is not dispositive, as the Enabling Clause is not consistent when using such terms.
305
7.73 The European Communities also argues that India's interpretation of paragraph 3(c) would
make it impossible for paragraph 3(c) to apply to paragraph 2(d) which allows for more favourable
treatment to be provided to the least-developed countries.  Moreover, the European Communitiesconsiders that if paragraph 3(c) required responding to the development needs of all developing
countries in terms of appropriate product coverage and depth of tariff cuts, then a GSP scheme that
provided a narrower product coverage and a smaller tariff margin would be illegal, an implication not
intended by the drafters.
306
7.74 The European Communities also states that it might be argued that paragraph 3(c) is a
purposive provision, not setting out any specific legal obligations.307  As such, it must be interpreted
so as to make it workable for the developed countries.  In particular, developed countries should notbe prevented from taking into account the most important needs.  They should not be prevented from
applying, in their GSP schemes, horizontal gradua tion mechanisms or from defining sub-categories of
                                                     
301 Second written submission of India, paras. 75 and 97;  reply of India to question No. 44 from the
Panel to both parties.
302 Reply of the European Communities to question No. 12 from the Panel to both parties;  second
written submission of the European Communities, para. 51.
303 Reply of the European Communities to question No. 12 from the Panel to both parties.
304 Reply of the European Communities to question No. 17 from the Panel to both parties;  reply of the
European Communities to question No. 8 from the Panel to India, para. 106; second written submission of theEuropean Communities, para. 51.
305 Reply of the European Communities to question No. 8 from the Panel to India, paras 101, 102-106.
306 Reply of the European Communities to question No. 17 from the Panel to both parties;  reply of the
European Communities to question No. 8 from the Panel to India, para. 109.
307 Reply of the European Communities to question No. 17 from the Panel to both parties.WT/DS246/R
Page 120
developing countries  which capture the  most significant differences between them, and providing
special preferences to such sub-groups of developing countries.308
7.75 The European Communities also argues that since the developed countries are free to decide
whether or not to provide GSP schemes, they ar e also free to decide whether or not to grant
preferences with respect to certain products and to choose the depth of the tariff cuts that they wish tooffer.
309
7.76 On the status of the Agreed Conclusions, the European Communities argues that they are  not
context of either the 1971 Waiver Decision or the Enabling Clause, because the Agreed Conclusions
are not a binding agreement and were not made "in connection with the conclusion of" the 1971
Waiver Decision or the Enabling Clause.  Rather, in the European Communities' view,  the Agreed
Conclusions and other UNCTAD texts are preparator y work  for the 1971 Decision and, as such, they
are supplementary means of interpretation.310
7.77 The Andean Community argues that nothing in the Enabling Clause requires developed
countries to respond to all or any particular development needs in establishing GSP.311 The United
States argues that, under paragraph 3(c), GSP schemes need not be extended on a "one size fits all"
basis and that distinctions based on the unequal development situations of developing countries are
permitted.312  Otherwise, the United States argues, the term "generalized" would be redundant and
paragraph 7 of the Enabling Clause would not work in practice.313
(b) Panel's analysis
(i) Introduction
7.78 The Panel notes that a textual reading of the language of paragraph 3(c) – whereby GSP
schemes shall be designed and modified "to respond positively to the development, financial and tradeneeds of developing countries" – does not reveal whether the "needs of developing countries" refers to
the needs of all developing countries or to the needs of individual  developing countries.  A simple
textual reading does not divulge whether the scheme should respond to the needs of different
developing countries in such a manner as to provide the same set of product coverage and the same
level of preference margin to all developing countries, as India suggests, or, whether a scheme mayrespond to special development needs of certain developing countries based on objective criteria, as
proposed by the European Communities.  In the Panel's view, the understanding that India suggests
cannot on first appearances be reconciled with paragraph 2(d), which permits special preferences to be
provided to the least-developed countries.  On the other hand, the interpretation that the European
Communities proposes cannot be supported by the absence of the word "individual" in paragraph 3(c)
whereas this word does appear in paragraph 5 of the Enabling Clause.  The parties come out with very
different readings of the meaning of paragraph 3.
7.79 Under these circumstances, the Panel considers it is necessary to have recourse to the context
of paragraph 3(c) and other relevant means of interpretation, in line with Articles 31 and 32 of the
Vienna Convention on the Law of Treaties ("Vienna Convention").
                                                     
308 Reply of the European Communities to question No. 17 from the Panel to both parties, paras. 57,
62-64.
309 Reply of the European Communities to question No. 8 from the Panel to India, para. 110.
310 Second written submission of the European Communities, para. 37;  reply of the European
Communities to question No. 44 from the Panel to both parties.
311 Reply of the Andean Community to question No. 10 from the Panel to all third parties.
312 Reply of the United States to question No. 6 from the Panel to all third parties;  first oral statement
by the United States, para. 12.
313 Reply of the United States to questions Nos. 6 and 10 from the Panel to all third parties.WT/DS246/R
Page 121
7.80 The Panel notes that nothing exists in the GATT or the WTO relating to GSP arrangements,
other than the 1971 Waiver Decision and the En abling Clause.  It notes, however, the GSP
arrangements were initially drawn up in UNCTAD and transferred into the GATT through the 1971
Waiver Decision.  The Panel therefore considers it helpful to review the drafting history in UNCTAD
and to identify the intention of the drafters on issues relating to the GSP arrangements.  In this regard,the Panel recalls that the parties disagree on whether or not the Agreed Conclusions are context for the
Enabling Clause.  The Panel is of the view that it should therefore consider the status of the Agreed
Conclusions with respect to the interpretation of the Enabling Clause.
(ii) Status of the Agreed Conclusions for the interpretation of the Enabling Clause
7.81 The Enabling Clause, in its footnote 3, refers to the Generalized System of Preferences "[a]s
described in [the 1971 Waiver Decision], relating to the establishment of 'generalized, non-reciprocal
and non-discriminatory preferences beneficial to the developing countries'".  The 1971 WaiverDecision recalls that "unanimous agreement was reached in favour of the early establishment of a
mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences
beneficial to the developing countries" and that "mutually acceptable arrangements have been drawn
up in the UNCTAD concerning [GSP]".  The mutually acceptable arrangements referred to in the
1971 Waiver Decision are the Agreed Conclusions.  The Agreed Conclusions actually set out thedetails and institutional arrangements of GSP.  Consequently, an analysis of the significance of the
Agreed Conclusions for the interpretation of the Enabling Clause is of critical importance.
7.82 The Agreed Conclusions resulted from negotiations mandated by Resolution 21(II) of the
Second Session of UNCTAD, passed on 26 March 1968.  It was in this Resolution that UN member
States agreed to "the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences which would be beneficial to the developing
countries".  It should be noted that Resolution 21(II) itself did not set up the details of the GSP
arrangements although it did set out its objectives and principles.  The Resolution established a
Special Committee on Preferences as a subsidiary organ of the Trade and Development Board, with
the express mandate to settle the details of the GSP arrangements.
7.83 The outcome was the Agreed Conclusions, mu tually agreed in the Special Committee on
Preferences, "recogniz[ing] that these preferential arrangements are mutually acceptable and represent
a cooperative effort which has resulted from the detailed and intensive consultations between the
developed and developing countries which have taken place in UNCTAD".
314  Included in these
Agreed Conclusions was a recommendation "that the Trade and Development Board at its fourth
special session adopt the report of the Special Committee on its fourth session, take note of these
conclusions [and] approve the institutional arrangements proposed in section VIII … ".315
7.84 Thus, the details for the establishment of generalized, non-reciprocal and non-discriminatory
preferences beneficial to developing countries were set out in the Agreed Conclusions and in related
documents incorporated by reference in these Agreed Conclusions.  The fact that the Agreed
Conclusions themselves were noted, not adopted, by the Trade and Development Board does not
change their legal status as an instrument containing the agreed detailed arrangements of the GSP.
7.85 The Agreed Conclusions also provide "that no country intends to invoke its rights to most-
favoured-nation treatment … and that the contracting parties to the General Agreement on Tariffs and
Trade intend to seek the required waiver or waivers as soon as possible".  During the GATT Council
meeting adopting the 1971 Waiver Decision, the countries requesting this waiver expressly mentioned
(i) that, in Resolution 21(II) of the Second Session of UNCTAD, "there has been unanimous supportfor the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-
                                                     
314 Agreed Conclusions, Section 1, para. 9.
315 Ibid., Section I, para. 11.WT/DS246/R
Page 122
discriminatory preferences which would be beneficial to the developing countries"; (ii) that the
Agreed Conclusions worked out in UNCTAD "were mutually acceptable to and represented a co-
operative effort of both developing countries and developed countries";  (iii) that "it has been agreed
that the prospective preference-giving countries would seek as rapidly as possible the necessary
legislative or other sanctions with the aim of implementing the preferential arrangements"; and(iv) that "it was a part of this undertaking that the prospective preference-giving countries were now
seeking a waiver in the GATT".  The representative of the preference-giving countries emphasized
that "the waiver was to cover the arrangements as set forth in the Agreed Conclusions reached in
UNCTAD".
316  With the above considerations in mind, the Panel is of the view that the Agreed
Conclusions were incorporated by reference into the 1971 Waiver Decision.
7.86 From the above factual review, the Panel considers that the 1971 Waiver Decision is intended
to cover the Agreed Conclusions.  According to  Article 31.2(a) of the Vienna Convention, an
"agreement relating to the treaty which was made between all the parties in connexion with the
conclusion of the treaty" constitutes context of the treaty.  The Panel considers that Resolution 21(II)
and the Agreed Conclusions establish such an agreement relating to the conclusion of the 1971
Waiver Decision;  therefore, they are context for the 1971 Waiver Decision in the sense of
Article 31.2(a) of the Vienna Convention.  This is confirmed by the fact that the 1971 WaiverDecision itself does not contain any specifics on GSP arrangements.
7.87 The fact that the Enabling Clause incorporates GSP " as described in  the Decision of the
CONTRACTING PARTIES of 25 June 1971, relating to the establishment of generalized, non-
reciprocal and non-discriminatory preferences to developing countries", also strongly suggests that
Resolution 21(II) and  the Agreed Conclusions were carried over from the 1971 Waiver Decision intothe 1979 Enabling Clause so as to constitute a co ntext for the Enabling Clause in relation to GSP
arrangements, and paragraphs 2(a) and 3(c) in particular.  The Panel notes that on the occasion of the
discussion and approval of the 1979 Enabling Clause , there was no discussion at all in the GATT as to
the nature and characteristics of the GSP.
7.88 The Panel recalls that both India and the European Communities agree that Resolution 21(II)
and the Agreed Conclusions can be considered as preparatory work for the 1971 Waiver Decision, but
that India argues that the Agreed Conclusions are also context for the 1971 Waiver Decision and the
Enabling Clause.  The Panel recalls its finding in paragraphs 7.86 and 7.87 that Resolution 21(II) and
the Agreed Conclusions are context for the 1971 Waiver Decision and the  Enabling Clause.  The
Panel considers that, because Resolution 21(II) and the Agreed Conclusions record the history and
results of the negotiations on GSP arrangements, they are also preparatory work for both the 1971
Waiver Decision and the Enabling Clause, in the sense of Article 32 of the Vienna Convention.
(iii) Product coverage and depth of tariff cuts as part of the Agreed Conclusions
7.89 In interpreting paragraph 3(c), the Panel considers that Section I of the Agreed Conclusions is
particularly helpful in understanding the mechanis ms in GSP arrangements relating to "responding to
the development needs of developing countries".  Paragraph 3 of Section I states that
"[the Special Committee on Preferences] welcomes with appreciation the revised
submissions by the developed market-economy countries
317, which should be read in
conjunction with the preliminary submissions of November 1969.318  T h e s e
submissions represent an important success in the efforts and endeavours in
UNCTAD in order to put a generalized system of preferences into operation and an
important element in the fulfilment of the aims and objectives of Conference
                                                     
316 C/M/69, pp. 1-2.
317 TD/B/AC.5/34.
318 TD/B/AC.5/24.WT/DS246/R
Page 123
Resolution 21(II) mentioned above and in the international strategy for development
in the 1970s".319
7.90 The submissions referred to above are the documents "Tariff Preferences for Developing
Countries – Documentation Forwarded by OECD to UNCTAD"320 (14 November 1969) and "Tariff
Preferences for Developing Countries – Revise d Documentation Forwarded by OECD to UNCTAD"
(19 September 1970).321  These submissions contain the principles and GSP schemes offered by
preference-giving countries based on consultations with developing countries.   Because these
documents are expressly referenced in the Agreed Conclusions, the principles and offers expressed
therein faithfully reflect the common understanding on GSP schemes between the developed and
developing countries.
7.91 Of particular interest in these two documents are the sections providing agreed offers on the
part of the developed countries with respect to the product coverage and the depth of tariff cuts.  Itwas agreed that GSP schemes should apply in principle to all industrial semi-manufactured and
manufactured products, as prescribed in chapters 25-99 of the Brussels Nomenclature;  other products,
including agricultural products in chapters 1-24, could be included on a case-by-case basis in the form
of positive lists provided by donor countries;  and donor countries could make limited exceptions,
excluding from their GSP offers a limited number of products under chapters 25-99 or reserving theirrights to make such limited exceptions.
322
7.92 For products in chapters 25-99, it was also stated that preferences would take the form of
exemptions from custom duties, but a few donor countries offered linear tariff reductions or variable
preferential duties .323  It was further stated by one donor country that preferential duties would in
general be at the same levels as those existing in the special preferences that certain donor countrieshad been providing to certain developing countries.
324
7.93 For those selected products in chapters 1-24 which would be included by donor countries in
their GSP schemes, some donor countries offered duty-free preferences, while others offered variable
tariff reductions at different depths of tariff cuts.325
7.94 The Panel notes:  (i) that the Agreed Conclusions "welcomed" these submissions and referred
to them as an important element  in the fulfilment of the aims and objectives of Conference
Resolution 21(II);  and (ii) that the fact that the Agreed Conclusions did not repeat any "conclusions"
on the product coverage and on the depth of tariff cuts, means that the offers proposed by developed
countries in these submissions were acceptable to and agreed  by all countries involved.  The same
arrangements were also covered by the 1971 Waiver Decision in view of the intention of Members, as
expressed in the GATT Council, to cover in that instrument all arrangements set out in the Agreed
Conclusions.
7.95 Further, the Panel notes that because the levels of product coverage and depth of tariff cuts
contained in the GSP offers were negotiated and mutually agreed between developed and developing
countries, it cannot be assumed that GSP schemes providing for lesser product coverage or depth of
tariff cuts would have been acceptable to the developing countries.  Also, in relation to future
implementation of GSP schemes, the Panel sees no basis for concluding that the level of productcoverage and depth of tariff cuts in general could be less than the level and depth offered and accepted
in the Agreed Conclusions.                                                     
319 TD/B/330.
320 TD/B/AC.5/24, 14 November 1969.
321 TD/B/AC.5/34, 19 September 1970.
322 TD/B/AC.5/24, para. 15.
323 TD/B/AC.5/24, para. 18.
324 TD/B/AC.5/24, para. 18.
325 TD/B/AC.5/24, para. 19.WT/DS246/R
Page 124
7.96 The Panel notes that the original negotiated offers also contained exceptions mechanisms
where the preference-giving countries reserved their rights to exclude a limited number of products
from their schemes.326  But, as the Panel understands it, these limited exceptions did not change the
basic requirements that the level of product coverage and depth of tariff cuts in general could not be
less than those provided in the negotiated offers.
7.97 From the 1979 UNCTAD Review, the Panel notes that the arrangements on product coverage
and depth of tariff cuts were implemented during the period 1971-1979 by Members in their
respective GSP schemes.  Improvements were also made voluntarily by certain donor countries with
regard to the depth of tariff cuts in their respective schemes.327  The Panel considers that the practice
of Members in the implementation of GSP schemes confirms its understanding that the general level
of product coverage and depth of tariff cuts should not be reduced.
(iv) Responding positively to development needs of developing countries
7.98 There is no express mention in the Enabling Clause of any change to the details of the GSP
arrangements earlier agreed in the Agreed Conclusions and incorporated into the 1971 Waiver
Decision, nor is there any other record in GATT or  in the WTO of any action in connection therewith.
Therefore, the Panel considers that the arrangements on product coverage and depth of tariff cuts
agreed upon in the Agreed Conclusions are still valid elements dealing with the design of GSP
schemes in the Enabling Clause.
7.99 Since paragraph 3(c) is the relevant provision in the Enabling Clause addressing the design
and modification of GSP schemes, the Panel finds that  paragraph 3(c) requires that, in designing and
modifying GSP schemes, preference-giving countries provide product coverage and tariff cuts at
levels in general no less than those offered and accepted in the Agreed Conclusions.  In addition, thePanel considers that paragraph 3(c), by requiring preference-giving countries to "respond positively to
the development, financial and trade needs of developing countries", does not exclude, but actually
encourages, further improvements in the levels of product coverage and depth of tariff cuts,
commensurate with development needs of developing countries.
(v) Whether a GSP scheme can be accorded to less than all developing countries
7.100  With respect to the issue of whether paragraph 3(c) allows GSP schemes to be extended to
less than all developing countries, responding to the specific development needs of these countries,
not the specific needs of other developing countries, the Panel finds nothing in the text of the
Enabling Clause or in its drafting history to support the European Communities' argument that
paragraph 3(c) permits developed countries to respond to similar development needs of selected
developing countries "according to objective criteria".  Moreover, if the Panel were to uphold the
European Communities' argument, it would be faced with having to decide what constitutes "objectivecriteria" justifying the selective inclusion of only certain development needs, to the exclusion of
others.  The Panel notes that there has never been any collective guidance by GATT Contracting
parties or the membership of the WTO in this respect.
7.101  The European Communities provides two elements  as constituting the objective criteria for
differentiating among developing countries.  It indicates that:  (i) the difference in treatment mustpursue a legitimate aim;  and (ii) the difference in treatment must be a reasonable means to achieve
that aim.  Should such criteria be used, however, then any differentiation favouring one or a few
selected developing countries, not other developing countries, could be justified because, firstly, each
developing country has its different development needs caused by different problems, for which any
                                                     
326 TD/B/AC.5/24, paras. 20-21.
327 Review and evaluation of the generalized system of preferences, 9 January 1979, TD/232,
paras. 19-20).WT/DS246/R
Page 125
measure addressing such problem could be said to be for a legitimate aim and, secondly, any higher
margin of tariff preferences (higher than that provided to other developing countries) on products of
export interest to these favoured developing countries would serve the legitimate aim of supporting
development in these favoured developing countries.
7.102  Tariff preferences would very often be a "reasonable means" to achieve that legitimate aim of
promoting development.  For example, providing tariff preferences would help to solve the
development problem of some developing countries stemming from the size of population, by
creating more jobs in labour-intensive industries.  If the Panel were to uphold the European
Communities' interpretation, the way would be open for the setting up of an unlimited number of
special preferences favouring different selected developing countries.  The end result would be the
collapse of the whole GSP system and a return back to special preferences favouring selected
developing countries, precisely the situation that ne gotiators aimed to eliminate back in the late 1960s.
7.103  Indeed, the Panel cannot discern any "objective criteria" according to which preference-giving
countries may treat different developing countries differently under GSP schemes.  There is no
reasonable basis to distinguish between different types of development needs, whether they are caused
by drug production and trafficking, or by poverty, na tural disasters, political turmoil, poor education,
the spread of epidemics, the magnitude of the population, or by other problems.  There could be noreasonable explanation why certain causes of the problem of development should be addressed
through GSP and why other causes of the same development  problem should not be so addressed.
7.104  Given the practical difficulties in elaborating any reasonable "objective criteria", the Panel
cannot assume that paragraph 3(c) envisages the existence of such "objective criteria" allowing for
differentiation in GSP schemes.  The only differentiation that is clearly understood to have beenagreed among GATT Contracting parties is the specia l treatment to the least-developed countries, as
set out in paragraph 2(d).  Without explicit provision, agreed multilaterally, for other bases for
differentiation among developing countries, the Panel does not think it can be assumed that Members
intended to permit such differentiation.
7.105  The Panel considers that the appropriate way of responding to the development needs of
developing countries is to take into account each and every  developing countries' development needs
by including, in the GSP schemes, a breadth of products of export interest to developing countries and
by providing sufficient margins of preferences for such products.  There is a requirement of
responsiveness of GSP schemes, even if there are no specific criteria for measuring the responsiveness
of individual GSP schemes.
7.106  The Panel, however, notes that GSP schemes contain mechanisms for differentiating among
developing countries in certain prescribed situations, one being that of safeguard mechanisms and theother being special treatment of the least-developed countries.
(vi) Safeguard mechanisms
7.107  The safeguard mechanisms originated in the Agreed Conclusions which permits:  (i) a priori
limitations on imports from developing countries;  and (ii) escape-clause type measures for the
purpose of retaining a certain degree of control over the trade which may be generated by new tariffadvantages.
328
7.108  The a priori limitations are measures that set import ceilings so as to exclude certain imports
originating in individual developing countries where the products concerned reach a certain
competitive level in the market of the preference-giving country.
                                                     
328 TD/B/330, Section III.WT/DS246/R
Page 126
7.109  From the very beginning of GSP implementation, the a priori measures were used by a
number of countries on non-agricultural products covered under their respective GSP schemes.  For
example, the scheme offered in 1970 by the EEC stat ed that "preferential imports will be effected up
to ceilings in value terms to be calculated for each product on a basis common to all products" and
that "in order to limit the preferences granted to the more competitive developing country or countriesand to reserve a substantial share for the less competitive, preferential imports of a given product from
a single developing country should not as a general rule exceed 50 percent  of the ceiling fixed for that
product".
329  Thus, under this scheme, GSP benefits are available for any given product only up to a
value that is no more than 50 per cent of the ceiling value.
7.110  With regard to safeguard mechanisms, the Agreed Conclusions also state that "the preference-
giving countries reserve the right to make changes in the detailed application as in the scope of their
measures (under safeguard mechanisms), and in particular, if deemed necessary, to limit or withdrawentirely or partly some of the tariff advantages granted".
330  Nevertheless, the preference-giving
countries, in the Agreed Conclusions, also "declare that such measures would remain exceptional and
would be decided on only after taking due account in so far as their legal provisions permit, of the
aims of the generalized system and the general interests of developing countries".331
7.111  The Panel notes that these a priori limitations still exist today, in different forms, in the GSP
schemes of a number of preference-giving countries.332
7.112  The Panel notes that the "escape-clause" type safeguard mechanisms are applicable to all
beneficiaries without differentiation and therefore do not have any bearing on the interpretation of
paragraph 3(c).  What are relevant are the "a priori" limitations as provided for expressly in the
Agreed Conclusions.  The Panel accordingly only addresses how the a priori limitations impact theinterpretation of paragraph 3(c).
7.113  Since:  (i) the a priori limitations are mainly based upon notions of competitiveness of
products or countries in particular export markets;  (ii) paragraph 3(c) is the provision in the Enabling
Clause that addresses how GSP schemes should respond to development needs;  and (iii) nothing
during the negotiations of the Enabling Clause suggests that the safeguard mechanisms were changed,the Panel considers that paragraph 3(c) incorporates the a priori  limitations under the safeguard
mechanisms section of the Agreed Conclusions into the Enabling Clause.
7.114  Whether a particular a priori limitation measure in a GSP scheme complies with the terms of
paragraph 3(c) is a matter that can only be decided in light of the particular factual setting of the
measure, and this is not a matter before this Panel.
(vii) Paragraph 2(d)
7.115  As required by the text of paragraph 3, "any differential and more favourable treatment
provided under this clause" shall comply with, inter alia , subparagraph (c).  Thus, paragraph 3(c) also
applies to paragraph 2(d) which permits special treatment to the least-developed countries.
Accordingly, the Panel considers that the interpretation of paragraph 3(c) has to accommodate the
implementation of paragraph 2(d).  The Panel is of the view that, in designing and modifying GSP
schemes,  paragraph 3(c) does allow for differentiation among developing countries, in the case ofspecial treatment to the least-developed countries.
                                                     
329 TD/B/AC.5/34/Add.1, Annex 1, Section I.
330 Agreed Conclusions, Section III, para.1.
331 Ibid.
332 See "The Generalized System of Preferences", Note by the Secretariat, WT/COMTD/W/93.  Several
of the GSP schemes mentioned in this Note contain different forms of "graduation" mechanisms.WT/DS246/R
Page 127
(c) Summary of findings on the interpretation of paragraph 3(c)
7.116  Based on the above analysis in paragraphs 7.89-7.115 above, the Panel finds that the elements
relevant to "respond[ing] positively to the development, financial and trade needs of developing
countries" under paragraph 3(c) include the following:  (i) the level of product coverage and depth of
tariff cuts in general should be no less than the level and depth offered and accepted in the AgreedConclusions, with the possibility of providing further improvements
333;  (ii) the design and
modification of a GSP scheme may not result in a differentiation in the treatment of different
developing countries, except as provided in points (iii) and (iv);  (iii) a priori limitations may be used
to set import ceilings so as to exclude certain imports originating in individual developing countries
where the products concerned reach a certain competitive level in the market of the preference-giving
country;  and (iv) differentiation is permitted among developing countries, in designing and
modifying GSP schemes, in the case of special treatm ent to the least-developed countries, pursuant to
paragraph 2(d).  No other differentiation among developing countries is permitted by paragraph 3(c).
3. "Non-discriminatory" in footnote 3
(a) Arguments of the parties
7.117  India states that the ordinary meaning of the term "discriminate" is "to make or constitute a
difference in or between;  distinguish" and "to make a distinction in the treatment of differentcategories of peoples or things".  In India's reading, "non-discriminatory" does not allow for the
making of distinctions between different categories of developing countries.
334
7.118  India argues that the context of the term "non-discriminatory" in footnote 3 of the Enabling
Clause is to be found in Article I:1 of GATT 1994 only, not in Articles III:4, X, XIII, XVII or XX of
GATT 1994 or in Article XVII of GATS.335  For India, the term "notwithstanding" in paragraph 1 of
the Enabling Clause means that the developed countries waive their MFN rights vis-à-vis the
developed country Member providing GSP to developing countries.  However, India considers that
there is nothing in paragraph 1 to indicate that developing countries also waive their MFN rights vis-
à-vis other developing countries receiving GSP be nefits from a developed country.  According to
India, the assumption that developing countries waive such MFN rights is inconsistent with the verypurpose of the GSP.
336  Consequently, the notion of non-discrimination as used in Article I:1 of
GATT 1994 – that of protecting equal competitive opportunities for like products originating in
different countries – is relevant and is not waived.337
7.119  India also argues that use of the article "the" before "developing countries" in footnote 3
means "all" when defining a plural noun.  India maintains that if "non-discrimination" in footnote 3
were not to refer to "all" developing countries, there would be no need to have paragraph 2(d) in
addition to paragraph 2(a);  the non-tariff measures implicated in paragraph 2(d) in favour of the least-developed countries could then have been included in paragraph 2(b).
338
7.120  India maintains that unless the Enabling Clause expressly so provides, there can be no valid
basis for differentiation among developing countries.  To interpret it otherwise would curtail the
benefits accruing to developing countries under Article I:1 and run counter to the very purpose of the
                                                     
333 However, according to paragraph 3(b) of the En abling Clause, the requirement as to the general
level of product coverage and the depth of tariff cuts shall not constitute an impediment to the reduction orelimination of tariffs and other restrictions to trade on an MFN basis.
334 First written submission of India, para. 57.
335 Reply of India to question No. 10 from the Panel to both parties.
336 Reply of India to question No. 9 from the Panel to both parties.
337 Reply of India to question No. 9 from the Panel to both parties.
338 Reply of India to question No. 9 from the Panel to both parties;  second written submission of India.WT/DS246/R
Page 128
GSP.339  The meaning of the term "non-discriminatory" in the Enabling Clause, India believes, is
identical to its meaning in the Agreed Conclusions.   The Agreed Conclusions contains no reference to
the notion that developed countries should be allowed to distinguish between developing countries.
The Agreed Conclusions do not even authorize developed countries to provide more favorable tariff
preferences to the least-developed countries to the exclusion of other developing countries.340
7.121  India also cites certain other texts from the UNCTAD documents to support its contention
that the term "non-discrimination" in footnote 3 indicates a requirement to provide equal tariff
preferences to all developing countries.  The Agreed Conclusions state that "there is agreement with
the objective that in principle all developing countries should participate as beneficiaries from the
outset".  General Principle Eight of the First UNCTAD Session calls  for preferential treatment to
"developing countries as a whole".  Resolution 21(II) also states that the objective of the GSP is to set
up a system "in favour of the developing countries" which, in India's understanding,  means in favourof all developing countries.
341  With these supporting texts and other UNCTAD documents to the
similar effect, India argues that Members intended that the benefits of GSP apply to all developing
countries, not just to some developing countries.342  For India, this conclusion is also confirmed by the
1979 UNCTAD GSP Review Report.  On all matters re lating to GSP, India maintains, the Enabling
Clause does not change the 1971 Decision, with one exception that paragraph 2(d) permits specialtreatment be given to the least-developed countries.
343
7.122  The European Communities argues that the word "discriminate" has a neutral meaning and a
negative meaning.  It notes the statement by the panel in Canada – Pharmaceutical Patents that the
term "discrimination" may have different meanings in different WTO contexts.  The full definition in
the legal context, in the European Communities' view, is "to make a distinction in the treatment ofdifferent categories of people, or thing, esp.  unjustly  or prejudicially  against the people on grounds of
race, colour, sex, social status, etc".
344
7.123  The European Communities also argues that the appropriate context of the term "non-
discriminatory" in the Enabling Clause is found in paragraphs 1, 2 and 3 of the Enabling Clause, and
particularly in paragraphs 2(a) and 3(c) and in the term "generalized" in footnote 3.345  I n  t h e
European Communities' view, Article I:1 and many other substantive provisions of GATT 1994 and
GATS are concerned with providing equal conditions of competition for imports of like products
originating in all Members.  In contrast, the European Communities believes, the Enabling Clause,
like other special and differential treatment provisions, seeks to create unequal competitive conditions
in order to respond to the special needs of developing countries.  Having regard to that objective, the
European Communities argues that differential treatment between developing countries according to
their development needs is no more discriminato ry than differentiating between developed and
developing countries.346
7.124  The European Communities maintains that "non-discriminatory" is not synonymous with
formally equal treatment.  Rather, in the European Communities' view, there is discrimination if equal
situations are treated unequally or if unequal situations are treated equally.  The European
Communities also maintains that there is a two-part standard for measuring whether "non-
                                                     
339 Reply of India to question No. 9 from the Panel to both parties.
340 Second written submission of India, paras. 97-100.
341 Reply of India to question No. 9 from the Panel to both parties; Reply of India to question No. 16
from the Panel to India.
342 Reply of India to question No. 9 from the Panel to both parties; Reply of India to question No. 16
from the Panel to India.
343 Reply of India to question No. 9 from the Panel to both parties.
344 First written submission of the European Communities, para. 66.
345 Reply of the European Communities to question No. 9 from the Panel to both parties, paras. 26-27.
346 Reply of the European Communities to question No. 10 from the Panel to both parties, paras. 36
and 39.WT/DS246/R
Page 129
discrimination" exists:  (i) whether the difference in treatment pursues a legitimate objective;  and
(ii) whether the distinction is a reasonable means to achieve the legitimate objective, i.e., whether the
measure is both apt to achieve that objective and proportionate.347  For the European Communities,
the meaning of discrimination differs from provision to provision.  The meaning of discrimination
under Article III of GATT 1994 is different from the meaning of discrimination under the chapeau toArticle XX of GATT 1994.
348  Under the Enabling Clause, the term "non-discriminatory" in
paragraph 2(a) does not prevent Members from treating differently developing countries which,
according to objective criteria, have different development needs.349
7.125  The European Communities maintains that General Principle Eight, Resolution 21(II) and the
Agreed Conclusions themselves are not context of the Enabling Clause, but are "preparatory work" of
the 1971 Decision and, as such, constitute supplementary means of interpretation, as specified in
Article 32 of the Vienna Convention.350  Moreover, the European Communities considers that the
UNCTAD texts that India relies upon do not support India's position on the meaning of non-
discrimination. Those texts, according to the European Communities, address the issue of whether all
developing countries should be recognized as benefi ciaries, which is linked to the meaning of the term
"generalized", rather than the issue of whether all beneficiaries should be granted identical
preferences, which is to be addressed by the term "non-discriminatory" in footnote 3.  The EuropeanCommunities considers that India's interpretation renders one of the terms "non-discriminatory" or
"generalized" redundant.
351
(b) Panel's analysis
(i) Introduction
7.126  The Panel considers that the ordinary meaning of "discriminate", depending on the context,
can have either a neutral  meaning of making a distinction or a negative  meaning carrying the
connotation of a distinction that is unjust or prejudicial.  As India indicates, the neutral meaning is "to
make or constitute a difference in or between;  distinguish" and "to make a distinction in the treatment
of different categories of peoples or things".352  As the European Communities indicates, the negative
meaning is "to make a distinction in the treatment of different categories of people or things, esp.unjustly  or prejudicially  against people on grounds of race, colour, sex, social status, age, etc."
353
7.127  In order to determine the appropriate meaning of this term in footnote 3, it is necessary to
consider the term in its context and in light of the object and purpose of the GATT.
7.128  The relevant context of "non-discriminatory" includes paragraphs 2(a), 2(d) and 3(c) in the
text of the Enabling Clause.  In paragraph 2(a), as the Panel has already found in paragraph 7.87, the
most relevant elements of context are Resolution 21(II) and the Agreed Conclusions.  Leading up to
Resolution 21(II), there are two formal submissions from the OECD Group354 and the Group of 77.355
                                                     
347 Reply of the European Communities to question No. 9 from the Panel to both parties, paras. 31-32;
Reply of the European Communities to question No. 33 from the Panel to both parties, para. 5.
348 Reply of the European Communities to question No. 10 from the Panel to both parties, paras. 38-40.
349 First written submission of the European Communities, para. 85.
350 Second written submission of the European Communities, para. 37.
351 Second written submission of the European Communities, para. 38;  Reply of the European
Communities to question No. 52 from the Panel to both parties, para. 57;  European Communities' comment onIndia's reply to question No. 16 from the Panel to India;  Reply of the European Communities to question No. 9from the Panel to both parties, para. 27.
352 The New Shorter Oxford English Dictionary , 4th Edition, p. 689.
353 The New Shorter Oxford English Dictionary , 4th Edition, p. 689.
354 Report by the Special Group on Trade with Developing Countries of the Organization for Economic
Cooperation and Development, 29 January 1968, TD/56.
355 Charter of Algiers, adopted on 24 October 1967, TD/38.WT/DS246/R
Page 130
There is also the earlier Recommendation from the First Session of UNCTAD356, which represents the
first call for the establishment of GSP.  The Pa nel considers that all these documents constitute
preparatory work for the Agreed Conclusions and, therefore, also for the 1971 Waiver Decision, and
for paragraph 2(a) of the Enabling Clause by virtue of footnote 3.
7.129  The Panel notes that it is in Resolution 21(II) of the Second Session of UNCTAD that the
concept of establishing a "generalized, non-reciprocal and non-discriminatory" system of preferences
is first set out.  The details of GSP arrangements were decided in the Agreed Conclusions, which were
carried over into the 1971 Waiver Decision and thereafter into paragraph 2(a) of the Enabling Clause
by virtue of footnote 3.  The Panel therefore will  proceed with an analysis of Resolution 21(II) in
order to explore the relevant context and preparatory work in UNCTAD.
(ii) Resolution 21(II)
7.130  The Panel notes that Resolution 21(II) indicates the "unanimous agreement in favour of the
early establishment of a mutually acceptable system of generalized, non-reciprocal and non-
discriminatory preferences", and  establishes the Special Committee on Preferences to elaborate the
details of GSP.  The "unanimous agreement" on these principles is evident from the documents
annexed to Resolution 21(II), setting out the positions taken by the developing countries in the
Charter of Algiers357and the positions taken by the developed countries in the Report of the Special
Group on Trade with Developing Countries submitted by the OECD.358  Resolution 21(II), by stating
in its preamble that it "tak[es] cognizance of the Charter of Algiers and the Report of the Special
Group on Trade with Developing Countries submit ted by the Organization for Economic Cooperation
and Development", effectively recognizes the relevant contents of these reports for the Resolution
itself.
7.131  Both developed and developing countries set out certain principles for the establishment of
GSP.  Those stated by the developing countries in the Charter of Algiers include the following:
"(a) … provide for unrestricted and duty-free access to the markets of all the
developing countries for all manufactures and semi-manufactures from all developing
countries;
…
(d) All developed countries should grant such preferences to all developing countries;
…
(g) The new system of generalized preferences should ensure at least equivalent
advantages to developing countries enjoying preferences in certain developed
countries to enable them to suspend their existing preferences on manufactures and
semi-manufactures".359
7.132  The principles for the GSP system as stated in the Report by the Special Group on Trade with
Developing Countries of the OECD360, include, inter alia , the following:
                                                     
356 First Session of UNCTAD, Final Act and Report, Rec.  A.II.1.
357 TD/38.
358 TD/56.
359 See Part Two, B.  Expansion of Exports of Manufactures and Semi-manufactures, para. 1, Charter
of Algiers, adopted on 24 October 1967, in: Proceedings  of the Second Session of UNCTAD, Vol.  I: Reports
and Annexes, TD/38, p 434.
360 TD/56.WT/DS246/R
Page 131
"(3) Such new arrangements should aim to accord broadly equivalent
opportunities in all developed countries to all developing countries;
(5) Any new arrangements for the grant of special tariff treatment cannot be put
into effect without the support of developing countries, and their views
should be taken into account in the formulation of any such arrangements".361
7.133  On the phasing out of existing special preferences, the OECD Special Group report states that
"it is recognized that many countries would see as an important objective of the new
arrangements a movement in the direction of equality of treatment  for the exports of
all developing countries in developed country markets.  At the same time, developing
countries at present receiving preferences in some such markets would expect the
arrangements to provide them with increased export opportunities to compensate for
their sharing of their present advantages".362
7.134  The Panel is of the view that the "unanimous agreement", as stated in Resolution 21(II) and
emanating from the above-mentioned positions of developing and developed countries, is that the
existing special preferences provided to a limited number of developing countries would be replaced
by a generalized system of preferences which would be provided to all developing countries equally ,
without the possibility of differentiation in treat ment among developing countries by preference-
giving countries.
(iii) Agreed Conclusions
7.135  The Agreed Conclusions, addressing the issue of "Reverse Preferences and Special
Preferences", states in Section II: "[T]he Special Committee notes that, consistent with Conference
Resolution 21(II), there is agreement with the obje ctive that in principle all developing countries
should participate as beneficiaries from the outset".  This statement addresses the issue of special
preferences whereby some preference-giving countries were providing preferential tariff treatments
only to certain designated developing countries, and not to others.  Reading this sentence in that light,
the Panel considers that the "agreement" refers to that of extending preferential tariff treatment to all
developing countries.
7.136  In addressing the impact of the elimination of special preferences between certain developed
countries and a limited number of developing countries, the Agreed Conclusions state: "[D]eveloping
countries which will be sharing their existing tariff advantages in some developed countries as the
result of the introduction of the generalized system of preferences will expect the new access in other
developed countries to provide export opportunities at least to compensate them".  In other words, for
developing countries enjoying special preferences in the past, the possible loss of market share in one
developed country, previously providing special pr eferences to them, would be compensated by the
fact that other developed countries not previously providing special preferences to them, would
provide preferential treatment to them upon the establishment of GSP.
7.137  There is little doubt that these statements imp lied that all special preferences existing before
the establishment of GSP would thereafter be extended to all developing countries without
differentiation .  Logically, if differentiation in treatment among different developing countries were
permitted in the Agreed Conclusions, such differ entiation would have defeated the requirement of
                                                     
361 See Part One, Report by the Special Group on Trade with Developing Countries submitted by the
OECD on 29 January 1968 to UNCTAD, in: Proceedings of the Second Session of UNCTAD, Vol.  I: Reports
and Annexes, TD/56, p.  79.
362 Ibid, Part One, "H – Preferences received by some developing countries in the markets of some
developed countries", p.  79.WT/DS246/R
Page 132
elimination of existing special preferences and would have caused the same problems as those caused
by the existence of the special preferences prevailing before the establishment of the GSP, namely,
discrimination among de veloping countries.363
7.138  In addressing the special measures in favour of the least-developed countries, Section V of the
Agreed Conclusions states: "[T]he preference-giving country will consider, as far as possible, on acase-by-case basis, the inclusion in the generalized system of preferences of products of export
interest mainly to the least developed among the developing countries, and, as appropriate, greater
tariff reductions on such products".  At that time, there was no possibility of providing wider product
coverage or deeper tariff cuts only for the least-developed countries .
7.139  The approach taken to ensuring benefits to the least-developed countries was to:  (i) include
products of export interest to these countries in the scope of product coverage of the GSP schemes;
and (ii) provide greater tariff cuts on such products when appropriate.  However, in its design, thescheme as a whole was to be provided to all developing countries so that although the GSP would
provide formally equal treatment  to all developing countries, it would respond to the needs of the least
developing countries more effectively.  Under the Agreed Conclusions, there was no possibility to
provide formal differentiation in GSP schemes to favour the least-developed countries.
7.140  However, as the Panel concluded in its analysis under paragraph 3(c) of the Enabling Clause,
the Agreed Conclusions permit a priori limitations.  The Panel considers, accordingly, that the Agreed
Conclusions do not provide a legal basis for differentiation among developing countries other than
that for the implementation of a priori limitations.
(iv) Recommendation A.II.1 of the First Session of UNCTAD
7.141  It is worth noting that at the conclusion of the First Session of UNCTAD, Members adopted
general principles and recommendations relating to the abolishment of special preferences and the
establishment of GSP.  These principles and recommendations directly led to the adoption of
Resolution 21(II) in the Second Session of UNCTAD.
7.142  General Principle Eight of the First Session of UNCTAD provides:
"International trade should be conducted to mutual advantage on the basis of the
most-favoured-nation treatment and should be free from measures detrimental to the
trade interests of other countries.  …  New preferential concessions, both tariff and
non-tariff, should be made to developing countries as a whole  and such preferences
should not be extended to developed countries.  …  Special preferences at present
enjoyed by certain developing countries in certain developed countries should be
regarded as transitional and subject to progressive reduction.  They should be
eliminated as and when effective international measures guaranteeing at leastequivalent advantages to the countries concerned come into operation".
364
7.143  Recommendation A.II.1.  provides:
"Preferential arrangements between developed countries and developing countries
which involve discrimination  against other developing countries, and which are
essential for the maintenance and growth of the export earnings and for the economicadvancement of the less developed countries at present benefiting therefrom, should
                                                     
363 See "the Problems of special preferences – trad e policy aspects, Reports by the secretariat of
UNCTAD" on 12 January 1968, in Proceedings of the Second Session of UNCTAD, Vol.  V, Special problemsin world trade and development,  pp.  39-49.
364 Proceedings of UNCTAD, Vol.1, Final Act and Report adopted on 16 June 1964.  (Emphasis added)WT/DS246/R
Page 133
be abolished pari passu  with the effective application of international measures
providing at least equivalent advantages for the said countries.  These international
measures should be introduced gradually in such a way that they become operative
before the end of the United Nations Development Decade."365
7.144  From the above analysis of Resolution 21(II), the Agreed Conclusions and the relevant
preparatory work leading to the establishment of G SP, the Panel considers that the clear intention of
the negotiators was to provide GSP equally to all developing countries and to eliminate all
differentiation in preferential treatment to developing countries, with the exception of the
implementation of a priori limitations in GSP schemes.   The Panel concludes, from its review of the
context and preparatory work, that the requirement of non-discrimination, as a general principle
formally set out in Resolution 21(II) and later carried over into the 1971 Waiver Decision and then
into the Enabling Clause, obliges preference-giving countries to provide the GSP benefits to all
developing countries without differentiation, except for the implementation of a priori limitations in
GSP schemes.
(v) Paragraph 2(d)
7.145  The fact that the Enabling Clause expressly allows developed countries to provide special
treatment to the least-developed countries in paragraph 2(d) also suggests that, in the context of GSP,it is only due to paragraph 2(d) that special treatment to the least-developed countries is permitted.  If
the Agreed Conclusions in themselves allowed su ch more preferential treatment, there would have
been no need to include paragraph 2(d) in the Enabling Clause.  Accordingly, it is clear that formally
identical treatment is required to be given to all developing countries under the non-discrimination
requirement of footnote 3, as applied to paragraph 2(a).
7.146  The Panel notes the European Communities' arguments that paragraph 2(d) covers both tariff
and non-tariff measures, that the term "non-discriminatory" in paragraph 2(a) allows developed
countries to differentiate between developing countries according to objective criteria, but that this
provision only deals with tariff preferences, and that, accordingly, there is still a need to provide for
special treatment in favour of least-developed countries through paragraph 2(d).  The Panel also notesIndia's argument that if paragraph 2(a) allowed differentiation between developing countries, in the
same way paragraph 2(b) would also allow differen tiation among developing countries;  it would thus
have been more logical to combine paragraphs 2(b) and 2(d) into one paragraph rather than to have a
separate paragraph 2(d) allowing for both tariff and non-tariff measures favouring the least-developed
countries.
7.147  The Panel considers that if the term "non-discriminatory" in paragraph 2(a) allowed
developed countries to differentiate between developing countries according to objective criteria,paragraph 2(a) would cover tariff measures favouring the least-developed countries.  There might then
still be a need to have a separate paragraph to permit special non-tariff measures in favour of the least-
developed countries, beyond those "governed by the provisions of instruments multilaterally
negotiated under the auspices of the GATT" under paragraph 2(b).  However, this separate paragraph
would have excluded tariff preferences from its scope since these would have already been covered byparagraph 2(a).  The fact that paragraph 2(d) does not exclude tariff preferences from its scope further
confirms the understanding that the term "non-discriminatory" in paragraph 2(a) does not permit
differentiation among developing countries.  Therefore, paragraph 2(d) functions as an exception to
paragraph 2(a), authorizing special treatment to the least-developed countries, inter alia , in GSP
schemes.
                                                     
365 First Session of UNCTAD, Final Act and Report, Rec.  A.II.1.II.A.6.  (Emphasis added)WT/DS246/R
Page 134
(vi) Paragraph 3(c)
7.148  In light of its findings in paragraph 7.116 in respect of paragraph 3(c), specifically, that the
design and modification of a GSP scheme may not result in a differentiation in the treatment of
developing  countries, except for the implementation of a priori limitations, the Panel considers that
paragraph 3(c) provides no basis to read "non-discriminatory" in footnote 3 in a way allowing fordifferentiation among developing countries, except for the implementation of a priori limitations.
7.149  The Panel recalls the argument of the United States to the effect that GSP schemes need not
be extended on a "one size fits all" basis and that distinctions based on unequal development
situations are permitted.
366  However, the Panel has previously found that the only appropriate way of
responding to the differing development needs of developing countries is for preference-giving
countries to ensure that their schemes have sufficient breadth of product coverage and depth of tariff
cuts to respond positively to those differing needs.
(vii) Relevance of Article I:1 of GATT 1994
7.150  The Panel recalls India's arguments that: (i) there is nothing in the Enabling Clause that
exempts the European Communities from the obligation under Article I:1 of GATT 1994 to extend
tariff preferences accorded under the Drug Arrangements unconditionally to all developing countries;
and (ii) the term "unconditional", as interpreted by the panel in Canada – Autos , means independent
of the situation or conduct of the exporting country.  The Panel further recalls the European
Communities' arguments that:  (i) the Enabling Clause does not require the granting of differential and
more favourable treatment unconditionally ;  (ii) the meaning of "conditional" under Article I:1 is the
granting of tariff preferences in exchange for some  form of compensation;  and (iii) the Enabling
Clause only prohibits the condition  of reciprocity, not other conditions providing for non-reciprocal
compensation.
7.151  In addressing the relevance of Article I:1 for the interpretation of the Enabling Clause, the
Panel recalls its earlier findings that: (i) the Enabling Clause is an exception to Article I of GATT
1994;  and that (ii) the Enabling Clause does not exclude the applicability of Article I but rather
Article I and the Enabling Clause apply concurrently, with the Enabling Clause prevailing to theextent of inconsistency between the two provisions.  From these findings, the Panel considers that in
the absence of express authorization, no further derogation from Article I:1 can be assumed.  The
Panel's approach to the interpretation of "non-discri minatory" follows this general consideration as to
the relevance of Article I:1 in that the Panel ha s not interpreted this term to permit preferential
treatment to less than all developing countries without an explicit authorization.  Such explicit
authorization is only provided for the benefit of the least-developed countries in paragraph 2(d) of the
Enabling Clause and for the implementation of a priori limitations, as set out in the AgreedConclusions.
7.152  The Panel considers that, following the rules of interpretation as provided in Articles 31 and
32 of the Vienna Convention, it has already found sufficient guidance to determine the meaning of
"non-discriminatory" in footnote 3.  There is no need at this stage to search for further interpretative
guidance from Article I:1 of GATT 1994.
(viii) Relevance of other GATT provisions
7.153  The Panel recalls that both parties cite other GATT and GATS provisions to assist the
understanding of the term "non-discriminatory" in f ootnote 3, including Articles III, XIII, XVII and
XX of GATT 1994, as well as Article XVII of GATS.  The European Communities also mentions the
                                                     
366 Reply of the United States to question No. 6 from the Panel to all third parties;  first oral statement
by the United States, para. 12.WT/DS246/R
Page 135
panel statement in Canada – Pharmaceutical Patents  that "discrimination" may have different
meanings in different WTO contexts.  While the Pane l agrees that the term "discrimination" may have
different meanings under different WTO provisions, the Panel does not consider that these different
provisions contribute significantly to the understanding of the term "non-discriminatory" in GSP and,
more particularly, in footnote 3 of the Enabling Clause.
(ix) Object and purpose
7.154  The Panel recalls the European Communities' arguments:  (i) that the object and purpose of
paragraph 2(a) of the Enabling Clause, that of promoting the trade of all developing countries
commensurate with their development needs, is expressed in Article XXXVI:3 of GATT 1994 and in
the preamble of the 1971 Waiver, as well as in the preamble of the WTO Agreement;  and (ii) that the
interpretation of the term "non-discriminatory" should further the objectives of the Enabling Clause
and the WTO Agreement by allowing provision of a dditional preferences to developing countries with
special development needs, so that they can secure  a share of international trade commensurate with
those special needs.
7.155  The Panel notes that one of the objectives recited in the preamble of the WTO Agreement is
to secure, for the developing countries, a share in the growth in international trade commensurate with
their development needs, and that the 1971 Waiver Decision and Article XXXVI:3 of GATT 1994 setout similar objectives.  These objectives are directly reflected in the Enabling Clause.
7.156  At the same time, the Panel notes that other objectives in GATT 1994 and the WTO
Agreement are also relevant, particularly since the Enabling Clause forms a part of GATT 1994.  Both
GATT 1994 and the WTO Agreement contain multiple objectives, none of which should be viewed in
isolation.
7.157  For the purpose of interpreting the term "non-discriminatory" in footnote 3 of the Enabling
Clause, the Panel considers that one of the most important objectives of GATT 1994, as stated in the
preamble, is "expanding the production and exchange of goods".  In order to achieve this objective,
the preamble sets out the principle of "elimination of discriminatory treatment in international
commerce".  This principle is reflected mainly in Articles I and III of GATT 1994.
7.158  The Panel considers that the function of the term "non-discriminatory" in footnote 3 is to
prevent abuse caused by discrimination in the granting of GSP among developing countries.  While
both the objective of promoting the trade of developing countries and that of promoting trade
liberalization generally are relevant to the interpretation of the term "non-discriminatory", the Panel is
of the view that the latter contributes more to gu iding the interpretation of "non-discriminatory", given
its function of preventing abuse in providing GSP.
(x) Practice of preference-giving countries
7.159  The Panel considers that the overall practice of preference-giving countries confirms the
common and consistent understanding of Members as to the term "non-discriminatory".  In
UNCTAD, during the negotiation of the Agreed Conclusions of the Special Committee on
Preferences, none of the GSP schemes offered by pr eference-giving countries actually contained any
differentiation in treatment to different developing countries, except for a priori limitations.
367    This
fact suggests that there was a common understanding of "equal" treatment to all developing countries
except for a priori measures, and that it was on this basis that the 1971 Waiver Decision was adopted.
7.160  The Panel also notes that the  practice of contracting parties after the 1971 Waiver Decision
continued  to reflect this common understanding, so that where a developed country wished to provide
                                                     
367 TD/B/AC.5/34.WT/DS246/R
Page 136
more favourable treatment to a limited number of developing countries, a waiver was sought from the
GATT or the WTO.  If the 1971 Waiver Decision and the Enabling Clause, other than through
paragraph 2(d) and the a priori limitation mechanism, allowed for differentiation among developing
countries in GSP schemes, there clearly would not be  such a large number of requests for waivers and
grants of those waivers.368
(c) Summary of findings as to the meaning of "non-discriminatory"
7.161  For the reasons set out in paragraphs 7.126-7.160, the Panel finds that the term
"non-discriminatory" in footnote 3 requires that identical tariff preferences under GSP schemes be
provided to all developing countries without differentiation, except for the implementation of a priori
limitations.
4. Paragraph 2(a)
(a) Arguments of the parties
7.162  India argues that nothing in the Enabling Clause indicates that developing countries have
waived their MFN rights vis-à-vis other developing countries.  Such an assumption, according to
India, would be inconsistent with the very purpose of paragraph 2, which is to create additional
benefits for the developing countries.  India maintains that the drafting history of the GSP in
UNCTAD indicates an intention that the GSP be provided to all developing countries, not just to someof them.  India points out that the GSP was intended to replace special preferences which preceded the
adoption of the 1971 Waiver Decision.  India also argues that the article "the" appearing  before
"developing countries" in footnote 3 of the Enabling Clause makes clear that GSP is to be provided to
all developing countries.
369
7.163  India maintains that the term "discriminatory"  refers to the denial of equal competitive
opportunities to like products originating in different countries and that with regard to tariff matters in
the context of the Enabling Clause, the meaning of  "non-discriminatory" must refer to the identical
application of duties to all countries.370
7.164  India states that the Enabling Clause did not change the GSP arrangement that existed under
the 1971 Waiver Decision, with the one explicit exception of permitting special and more favorabletreatment to the least-developed countries in accordance with paragraph 2(d).
371
7.165  The European Communities, in contrast, argues  that India's interpretation of "developing
countries" under paragraph 2(a) as meaning "all developing countries" would render redundant the
terms "generalized" and "non-discriminatory" in footnote 3.  Also, according to the European
Communities, India's interpretation would mean that the objective of paragraph 3(c) of responding
positively to the development, financial and trade needs of  developing countries could not be
achieved without differentiation.  The European Communities maintains further that the situationenvisaged in paragraph 7, that of developing countries participating more fully in the GATT
framework with the progressive development of their economies, would never be possible.
372
                                                     
368 See Annex V.
369 Reply of India to question No. 9 from the Panel to both parties.
370 Reply of India to question No. 9 from the Panel to both parties.
371 Reply of India to question No. 9 from the Panel to both parties.
372 Reply of the European Communities to question No. 9from the Panel to both parties;  second written
submission of the European Communities, para.16.WT/DS246/R
Page 137
7.166  The European Communities also argues that the concept of non-discrimination has different
meanings under different provisions or covered agreements.373
(b) Panel's analysis
7.167  In order to determine whether the term "developing countries" in paragraph 2(a) means all
developing countries, it is necessary to interpret this provision in the context of the Enabling Clause asa whole, including in particular the drafting history, footnote 3, paragraph 3(c) and paragraph 2(d).  In
giving meaning to this term in paragraph 2(a), it is important that this meaning be harmonized with
the rest of the Enabling Clause so as to ensure that the GSP system as a whole can function
effectively.  In this connection, the Panel recalls the Appellate Body's statement that "it is the  duty of
any treaty interpreter to 'read all applicable provis ions of a treaty in a way that gives meaning to  all of
them, harmoniously'.  An important corollary of this principle is that a treaty should be interpreted as
a whole, and, in particular, its sections  and parts should be read as a whole".
374
7.168  As noted, the parties disagree as to whether a developed country may give preferential tariff
treatment to less than all developing countries.  They disagree in particular on whether the presence of
the article "the" before "developing countries" in paragraph 2(a) and in footnote 3 makes a difference
in this regard.  The Panel considers, however, that the presence or absence of the article "the" before
developing countries by itself does not provide sufficient guidance on the underlying question.  Moreuseful guidance can be found in the drafting history of the GSP system.
7.169  As the Panel previously discussed in relation to the relevant context and preparatory work
leading to the Agreed Conclusions and the establishmen t of GSP, it considers that the intention of the
negotiators was to provide GSP equally to all developing countries and to eliminate all differentiation
in preferential treatment to developing countries, with the exception for the implementation of a priorilimitations.  Given this clear intention of the drafters of the GSP system, the Panel considers that it
should not interpret "developing countries" or "the developing countries" in a manner contrary to this
intention.
7.170  The Panel recalls its earlier finding on footnote 3 that the term "non-discriminatory" requires
identical tariff preferences under GSP schemes to be provided to all developing countries withoutdifferentiation, with the exception of the implementation of a priori limitations.  Thus, footnote 3 as
context for paragraph 2(a) does not authorize preference-giving countries to differentiate among
developing countries in their GSP schemes, with the exception of the implementation of a priori
limitations.
7.171  Paragraph 3(c) provides additional context to the interpretation of paragraph 2(a).  As
previously found by the Panel in paragraph 7.116, the elements relevant to "respond[ing] positively to
the development, financial and trade needs of developing countries" under paragraph 3(c) include,inter alia , that: " … (b) the design and modification of a GSP scheme may not result in a
differentiation in the treatment of different developing countries;  (c) a priori limitations may be used
to set import ceilings so as to exclude certain imports originating in individual developing countries
where the products concerned reach a certain competitive level in the market of the preference-giving
country;  and (d) differentiation is permitted among developing countries, in designing and modifyingGSP schemes, in the case of special treatment to the least-developed countries, pursuant to
paragraph 2(d).  No other differentiation among developing countries is permitted by paragraph 3(c)".
7.172  Paragraph 3(c) thus allows for a priori limitations, as an exception to the general requirement
of providing benefits to all developing countries.  While, textually, this form of safeguard was
negotiated and accepted in the Agreed Conclusions and carried over into the 1971 Waiver Decision,
                                                     
373 Reply of the European Communities to question No. 10 from the Panel to both parties, para. 10.
374 Appellate Body Report, Korea – Dairy , para. 81.WT/DS246/R
Page 138
nothing in the Enabling Clause suggests that there was any intention to change the legal status of such
a safeguard.  The a priori limitations contemplated in the GSP system and incorporated into
paragraph 3(c) impart meaning to paragraph 2(a), allowing a priori limitations as an exception to the
general prohibition on differentiation among developing countries.  For the Panel, in order to read
paragraphs 2(a) and 3(c) harmoniously, what is pe rmitted under paragraph 3(c) cannot be prohibited
by paragraph 2(a).
7.173  The Panel further notes that paragraph 2(d) permits developed countries to discriminate
between developing and the least-developed countries, by authorizing developed countries to grant
"special treatment" to the least-developed countrie s.  This provision was negotiated during the Tokyo
Round and agreed explicitly in the Enabling Clause.  The Panel considers that the function of
paragraph 2(d), reflecting the intention of negotiators, is to create an additional exception to the
requirement in paragraph 2(a) of providing GSP to all developing countries.
7.174  Based on the above analysis, the Panel finds that the term "developing countries" in
paragraph 2(a) should be interpreted to mean all developing countries, with the exception that where
developed countries are implementing a priori limitations 375, "developing countries" may mean less
than all  developing countries.
7.175  The Panel does not agree with the European Communities' argument that if "developing
countries" in paragraph 2(a) were to mean all developing countries, it would render the term
"generalized" in footnote 3 redundant.  Based on the context and the preparatory work of the Enabling
Clause, the term "generalized" in footnote 3 has two meanings:  (i) providing GSP to all developing
countries;  and (ii) ensuring sufficiently broad coverage of products in GSP.  The fact that there may
be at least a partial overlap in the meaning of "generalized" and the meaning of "developingcountries" in paragraph 2(a) does not make either of these terms redundant.
5. Conclusion on the Enabling Clause
7.176  From the above analysis, the Panel finds that:  (i) the European Communities has the burden
of demonstrating that its Drug Arrangements are consistent with the Enabling Clause;  (ii) the term
"non-discriminatory" in footnote 3 requires that identical tariff preferences under GSP schemes beprovided to all developing countries without differentiation, except for the implementation of a priori
limitations;  (iii) the term "developing countries" in paragraph 2(a) means all developing countries,
with the exception that where developed countries are implementing a priori limitations, "developing
countries" may mean less than all developing countries;  and (iv) paragraph 2(d), as an exception to
paragraph 2(a), allows developed countries to provide special treatment to the least-developed
countries.
7.177  Accordingly, the Panel finds that the European Communities' Drug Arrangements, as a GSP
scheme, do not provide identical tariff preferences to all developing countries and that the
differentiation is neither for the purpose of specia l treatment to the least-developed countries, nor in
the context of the implementation of a priori measures.  Such differentiation is inconsistent with
paragraph 2(a), particularly the term "non-discriminatory" in footnote 3, and cannot be justified by
paragraph 3(c) of the Enabling Clause.
F. 
ARTICLE  XX( B) OF GATT 1994 AS A JUSTIFICATION FOR THE DRUG ARRANGEMENTS
1. Introduction
7.178  The Panel recalls its findings that the Drug Arrangements are not consistent with Article I:1
of GATT 1994 and are not justified under the Enabling Clause.  The Panel further recalls the
                                                     
375 A detailed description of a priori limitations is provided in paras. 7.108 and 7.109.WT/DS246/R
Page 139
European Communities claim that the Drug Arrangements are justified by Article XX(b) of GATT
1994.  Accordingly, the Panel will proceed to examine whether the Drug Arrangements are justified
under Article XX(b).
7.179  Three issues arise in relation to the European Communities' invocation of Article XX(b) of
GATT 1994 as justification for its Drug Arrangements:  (i) whether the tariff preferences under theDrug Arrangements constitute a measure to protect human life or health in the European
Communities;  (ii) whether the tariff preferences under the Drug Arrangements are "necessary" within
the meaning of Article XX(b);  and (iii) whether the Drug Arrangements are applied in a manner
constituting arbitrary or unjustifiable discrimination in violation of the chapeau of Article XX.
2. Arguments of the parties
7.180  The European Communities maintains that it is beyond dispute that narcotic drugs pose a risk
to human life and health in the European Communities and that tariff preferences contribute to theprotection of human life and health by supporting the measures taken by other countries against the
illicit production and trafficking of those substances, thereby reducing their supply to the European
Communities.
376
7.181  On the assessment of the necessity of the m easure, the European Communities maintains that
according to Korea – Various Measures on Beef , "the more vital or important the common interests or
values pursued, the easier it would be to accept as necessary the measures designed to achieve those
ends".  It argues that the protection of human life and health is the most vital and important value, and
that, accordingly, the test of "necessary" in such a case should be given the broadest possible
meaning.  377
7.182  The European Communities cites a number of UN conventions, resolutions and other texts in
support of its claim that the United Nations has established a comprehensive and well-defined
international strategy against the drug problem.  The European Communities indicates that this UN
strategy calls for the adoption of comprehensive measures, implemented in accordance with the
principle of shared responsibility.  The European Communities indicates that in order to fight the drug
problem, it is necessary to combine initiatives to reduce illicit demand for drugs with those to reducetheir illicit supply.  The latter requires complementing eradication of drug production and trafficking
with the promotion of alternative economic activities.
378  Providing greater market access is one of the
components recommended.379  The European Communities thus argues that the Drug Arrangements,
along with financial aid and other means, are part of a comprehensive strategy to combat drug abuse,
and are one of the indispensable means..380
7.183  The European Communities contends that tari ff preferences under the Drug Arrangements
contribute to the development of the beneficiary countries while also reducing the supply of drugs intothe European Communities.  Consequently, the European Communities maintains, these tariff
preferences contribute to the health objective of combating drug abuse in the European
Communities.
381  The European Communities also argues that other drug-affected developing
countries do not need to be included under the Drug Arrangements because they receive the same or
better tariff treatment under other European Communities' tariff schemes.382  The European
                                                     
376 Executive summary of the first written submission of the European Communities, paras. 50 and 55.
377 Executive summary of the first written submission of the European Communities, para. 54.
378 Executive summary of the first written submission of the European Communities, paras. 30-33.
379 Reply of the European Communities to question No. 25 from the Panel to both parties;  first written
submission of the European Communities, para. 192.
380 Reply of the European Communities to question No. 25 from the Panel to both parties.
381 Reply of the European Communities to question No. 21 from the Panel to both parties.
382 Reply of the European Communities to question No. 24 from the Panel to both parties.WT/DS246/R
Page 140
Communities states as well that other developed countries do not need the assistance of the European
Communities in combating drugs, and that the battle against drugs is a shared responsibility.383
7.184  The European Communities also maintains that, as part of a balanced and comprehensive
approach, as recommended by the United Nations, it is indispensable to provide greater market access
to support the alternative development activities of the beneficiary countries.  In this regard, theEuropean Communities states that it is not aware of any alternatives that would be equally effective
but yet less trade-restrictive to provide effective market access to the products from the beneficiary
countries.
384
7.185  On whether the European Communities' measur e complies with the chapeau to Article XX,
the European Communities argues that the exclusion of other developing countries is not part of the
"design and structure" of the Drug Arrangements, but  rather of its application and, therefore, should
be examined under the chapeau of Article XX.385
7.186  The European Communities maintains that the countries excluded from the Drug
Arrangements do not pose a threat to the health of European Communities' citizens because they are
not a significant source of supply.386
7.187  The European Communities argues that the designation of the beneficiary countries under the
Drug Arrangements is based on an overall assessment of the gravity of the drug problem in eachdeveloping country in accordance with objective, non-discriminatory criteria.  The assessment takes
into account the importance of the production and/or trafficking of drugs in each country, as measured
on the basis of available statistics, as well as their effects.
387
7.188  The European Communities also maintains that the procedure for granting and withdrawal of
special preferences is also non-discriminatory.  According to the European Communities, the
exclusion of the least-developed and Cotonou countries, as well as the bilateral free-trade partners is
because they already benefit from other preferential tariff arrangements.  The exclusion of developed
countries is because the prevailing conditions are different in those countries.388
7.189  India argues that the Drug Arrangements "are not designed to achieve" the protection of
human life and health in the European Communities.  The European Communities merely asserts thisbut fails to substantiate its assertion.  An examination of the design, structure and architecture of the
Drug Arrangements shows that there is no express relationship between the objectives stated by the
European Communities and the Drug Arrangements.  India points to EC Council Regulation
2501/2001 and the Explanatory Memorandum of the Co mmission to the EC Council to illustrate that
the declared objectives of the Drug Arrangements relate to "sustainable development" rather than the
protection of health.
389 .
7.190  India maintains that if Article XX(b) could be used to justify preferential tariff arrangements,
the multilateral framework of trade negotiation would be undermined.  Members would be able to
accord preferential tariff treatment to selected WTO Members if this made a necessary contribution to
                                                     
383 Second written submission of the European Communities, paras. 66-70.
384 Executive summary of the second written submission of the European Communities, paras. 52-55.
385 Executive summary of the first written submission of the European Communities, para. 60;
executive summary of the second written submission of the European Communities, para. 44.
386 Executive summary of the second written submission of the European Communities, para. 48;  reply
of the European Communities to question No. 15 from the Panel to the European Communities.
387 Executive summary of the first written submission of the European Communities, para. 34.
388 Executive summary of the first written submission of the European Communities, para. 61.
389 Executive summary of second written submission of India, para. 27.WT/DS246/R
Page 141
the resolution of a health problem.  Such Member s would not be under an obligation to implement the
market access concessions multilaterally negotiated.  390
7.191  On the "necessity" requirement, India contends that the link between the Drug Arrangements
and Article XX(b) is remote.  India also contends that the simultaneous characterization of the Drug
Arrangements as a measure providing more favourable treatment to developing countries and as ameasure to protect human health in the European Communities is logically contradictory and based on
several flawed assumptions, specifically, that all drug-producing countries export their illegal crops to
the European Communities, that preferential tariff treatment will lead drug producers to produce other
products covered by the tariff preferences and that traffickers will switch to trading products covered
by the preferences.
391 The effect of the measure, according to India, is contingent upon several
external factors which are not in the control of the European Communities and which bring
uncertainty.  Furthermore, India contends that dr ug production and trafficking are organized crimes,
motivated by profit alone, and preferential tariffs would not eradicate such crimes.392
7.192  In addition, India states that the Drug Arrangements cannot be deemed "necessary" because
they are not granted to other developing countries affected with drug problems, such as Myanmar and
Thailand, and other drug-affected developing countries and developed countries.  India argues that the
European Communities fails to demonstrate that tariff preferences under the Drug Arrangements are"necessary" for the 12 beneficiary countries but not "necessary" for other drug-affected countries.
393
7.193  India also argues that the European Communities has not established that the Drug
Arrangements are "the least trade restrictive measure" available to pursue its health objective.  The
Drug Arrangements restrict both the present and the future trade of excluded Members.  India also
submits that there are many alternative, less trade-restrictive measures that the European Communitiescould take to achieve its objective, for example, direct technical and financial assistance for the drug
control efforts of affected countries or development aid and initiatives that do not restrict trade from
other WTO Members.
394
7.194  With regards to the chapeau, India argues that the European Communities fails to show how
the tariff preferences do not constitute arbitrary or unjustifiable discrimination or a disguisedrestriction on international trade.
395  India contends that the fact that the Drug Arrangements are only
limited to a closed set of 12 beneficiary countries is clear evidence of discrimination.  Moreover, India
maintains that the selection process for the Drug Arrangements is not transparent and that there is no
published procedure for the application and selection of beneficiaries.396  There is no evidence to
show that the European Communities has in fact conducted an objective assessment based on
objective criteria.  In India's view, based on the European Communities' explanation, it is not possible
to determine why, for instance, Pakistan was included while India and Paraguay were excluded.  Indiamentions that, in the ex post  justification that the European Communities presents to the Panel, it uses
statistics that became available after the beneficiaries were selected.
397
                                                     
390 Executive summary of second written submission of India, para. 33.
391 Second written submission of India, para. 155;  reply of India to question No. 21 from the Panel to
both parties.
392 Executive summary of second written submission of India, para. 28.
393 Reply of India to question No. 24 from the Panel to both parties.
394 Executive summary of second written submission of India, paras. 30-31;  reply of India to question
No. 21 from the Panel to both parties.
395 Second written submission of India, paras. 159-162.
396 Ibid., para. 32.
397 First oral statement of India, para. 24;  Executive summary of second written submission of India,
para. 25.WT/DS246/R
Page 142
3. Panel's analysis
7.195  In considering the jurisprudence on the approach of analysing measures claimed to be
justified under Article XX, the Panel recalls the following ruling of the Appellate Body in Korea –
Various Measures on Beef :
"For a measure … to be justified provisionally under paragraph (d) of Article XX,
two elements must be shown.  First, the measure must be designed to 'secure
compliance' with laws and regulations that are not themselves inconsistent with some
provisions of the GATT 1994.  Second, the measure must be 'necessary' to secure
such compliance".  398
7.196  Although the Panel notes that the Appellate Body ruling in Korea – Various Measures on
Beef was made in the context of the invocation of Article XX(d), not Article XX(b), the Panel is of the
view that the same considerations apply to both these subparagraphs of Article XX because thestructure of Articles XX(b) and XX(d) is very similar.  The Panel considers that the approach of
analysis followed by the Appellate Body in Korea – Various Measures on Beef  is also appropriate for
the analysis of a measure under Article XX(b).
7.197  Indeed, previous panels in the WTO have foll owed the same approach in their analysis of
Article XX(b).  In US – Gasoline , the panel stated that the United States had to establish three
elements to demonstrate consistency of its measure with Article XX(b):
"(1) that the policy  in respect of the measures for which the provision was invoked
fell within the range of policies designed to protect human … life or health;
(2) that the inconsistent measures for which the exception was being invoked
were necessary  to fulfil the policy objective;  and
(3) that the measures were applied in conformity with the requirements of the
introductory clause  of Article XX".
399
7.198  In EC – Asbestos , the panel followed the same approach as used in US – Gasoline :  "We must
first establish whether the policy in respect of the measure for which the provisions of Article XX(b)
were invoked falls within the range of policies designed to protect human life or health".400
7.199  Following this jurisprudence, the Panel considers that, in order to determine whether the Drug
Arrangements are justified under Article XX(b), the Panel needs to examine:  (i) whether the policy
reflected in the measure falls within the range of policies designed to achieve the objective of or, put
differently, or whether the policy objective is for the purpose of, "protect[ing] human … life or
health".  In other words, whether the measure is one designed to achieve that health policy objective;
(ii) whether the measure is "necessary" to achieve said objective;  and (iii) whether the measure is
applied in a manner consistent with the chapeau of Article XX.
(a) Whether the Drug Arrangements constitute a measure under Article XX(b)
7.200  In examining whether the Drug Arrangements are designed to achieve the stated health
objectives, the Panel needs to consider not only the express provisions of the EC Regulations, but also
the design, architecture and structure of the measure, as set out by the Appellate Body's reasoning in
Japan – Alcoholic Beverages II .  There, the Appellate Body stated that "the aim of a measure may not
                                                     
398 Appellate Body Report, Korea – Various Measures on Beef , para. 157.
399 Panel Report, US – Gasoline, para. 6.20.
400 Panel Report, EC – Asbestos, para. 8.184.WT/DS246/R
Page 143
be easily ascertained, nevertheless, its protective application can most often be discerned from the
design, the architecture and the revealing structure of a measure".401  The same analytical approach
was followed by the Appellate Body under Article XX in US – Shrimp .402
7.201  Examining the design and structure of Council Regulation 2501/2001403 and the Explanatory
Memorandum of the Commission404, the Panel finds nothing in either of these documents relating to a
policy objective of protecting the health of European Communities citizens.  The only objectives set
out in the Council Regulation (in the second preambular paragraph) are "the objectives of
development policy, in particular the eradication of poverty and the promotion of sustainable
development in the developing countries".  The Explanatory Memorandum states that "[t]hese
objectives are to favour sustainable development, so as to improve the conditions under which the
beneficiary countries are combatting drug production and trafficking.405
7.202  Examining the structure of the Regulation, the Panel notes that Title I provides definitions of
"beneficiary countries" and the scope of product coverage for various categories of beneficiaries.
Title II then specifies the methods and levels of tariff cuts for the various preference schemes set out
in the Regulation, including for the General Arrangements, Special Incentive Arrangements, Special
Arrangements for Least Developed Countries and Special Arrangements to Combat Drug Production
and Trafficking.  Title II also provides Comm on Provisions on graduation.  Title III deals with
conditions for eligibility for special arrangements on labour rights and the environment.  Title IV
provides only that the European Communities should monitor and evaluate the effects of the Drug
Arrangements on drug production and trafficking in the beneficiary countries.  There are other titles
dealing with temporary withdrawal and safeguard pr ovisions, as well as procedural requirements.
From an examination of the whole design and structure of this Regulation, the Panel finds nothinglinking the preferences to the protection of human life or health in the European Communities.
7.203  The Panel recalls the European Communities' argument that providing market access is a
necessary component of the comprehensive international strategy to fight the drug problem.  In this
regard, the Panel notes in particular the UN Convention against Illicit Traffic in Narcotic Drugs and
Psychotropic Substances (the "1988 Convention") submitted by the European Communities asExhibit 8.  Most of the provisions in this Convention relate to commitments on law enforcement
against drug trafficking, and the obligation of international cooperation.  For example, there are
international obligations relating to extradition and technical assistance.  At the same time,
Article 14.3(a) of the Convention encourages – but does not require – cooperation in relation to drug
eradication efforts.  It provides that "[s]uch cooperation may, inter alia , include support, when
appropriate, for integrated rural development leadin g to economically viable alternatives to illicit
cultivation.  Factors such as access to markets, the availability of resources and prevailingsocio-economic conditions should be taken into account before such rural development programmes
are implemented.  The parties may agree on any other appropriate measures of co-operation".
7.204  The Panel also notes the 1998 UN Resolution on "Measures to Enhance International
Cooperation to Counter the World Drug Problem", adopting the "1998 Action Plan".
406  I n  t h e
preamble to the Action Plan, the General Assembly reaffirms that "the fight against illicit drugs mustbe pursued in accordance with the provisions of th e international drug control treaties, on the basis of
the principle of shared responsibility, and requires an integrated and balanced approach in full
                                                     
401 Appellate Body Report, Japan – Alcoholic Beverages II , p.  29;  see also Appellate Body Report,
Argentina – Textiles and Apparel , para. 55.
402 Appellate Body Report, US – Shrimp , para. 137.  There the Appellate Body stated:  "We must
examine the relationship between the general structure and design of the measure here at stake, Section 609, andthe policy goal it purports to serve, that is, the conservation of sea turtles".
403 Exhibit India-6.
404 Exhibit India-7.
405 Explanatory Memorandum, para. 35, Exhibit India-7.
406 Exhibit EC-9.WT/DS246/R
Page 144
conformity with the purposes and principles of the Charter of the United Nations and international
law".  The preamble goes on to state that "effective crop control strategies can encompass a variety of
approaches, including alternative development, law enforcement and eradication".  "[A]lternative
development" is defined in the preamble of the Action Plan as "a process to prevent and eliminate the
illicit cultivation of plants containing narcotic drugs and psychotropic substances through specificallydesigned rural development measures in the co ntext of sustained national economic growth and
sustainable development efforts in countries taking action against drugs … ".
407
7.205  The Panel notes that in the operative sections of the 1998 Action Plan, alternative
development is stated to be an important component of the comprehensive strategy.408  T h e
international community is encouraged to provide adequate financial and technical assistance for
alternative development, with the objective of reducing illicit drug crops.  The international
community is also encouraged to provide greater access to markets for alternative developmentproducts.
409
7.206  From its examination of these international instruments, including the 1988 Convention and
the 1998 Action Plan, the Panel understands that alternative development is one component of the
comprehensive strategy of the UN to combat drugs.  The Panel has no doubt that market access plays
a supportive role in relation to alternative development, but considers that market access is not itself asignificant component of this comprehensive strategy.  As the Panel understands it, the alternative
development set out in the Action Plan depends more on the long-term political and financial
commitment of both the governments of the affect ed countries and the international community to
supporting integrated rural development, than on improvements in market access.
7.207  Even assuming that market access is an important component of the international strategy to
combat the drug problem, there was no evidence presented before the Panel to suggest that providing
improved market access is aimed at protecting human life or health in drug importing countries.
Rather, all the relevant international conventions and resolutions suggest that alternative development,
including improved market access, is aimed at helping the countries seriously affected by drug
production and trafficking to move to sustainable development alternatives.
7.208  The Panel recalls India's argument that Article XX(b) cannot be used to justify tariff
preferences that burden the trade of Members that are not the source of a health problem.  In other
words, according to India, Article XX cannot be used to authorize measures that would have the effect
of transferring resources from a country that is not the source of the health problem to countries that
are actually the source of the problem.
410  India also contends that if the tariff preferences are
necessary to protect the health of European Commun ities citizens, the logical implication is that the
European Communities would not be able to implement the market access concessions negotiated inthe Doha Work Programme.
411 For India, if the European Communities' Article XX(b) defence were
to be upheld, it would be exempted from the obligations under Articles I and II, and other developing
country Members would not have the assurance that the European Communities would apply tariffs
on an MFN basis in the future.  This would necessarily undermine the multilateral tariff reduction
negotiation process of the WTO.412
7.209  The Panel is of the view that this issue needs to be assessed through a weighing and balancing
of the level of contribution of such a measure in achieving the health objectives and the level of
                                                     
407 Ibid.
408 Ibid., para. 8.
409 Ibid.
410 Reply of India to question No. 55 from the Panel to both parties.
411 Second written submission of India, para. 163.
412 Comments of India to Replies of the European Communities to question No. 55 from the Panel to
both parties.WT/DS246/R
Page 145
damage of the measure to the multilateral negotiating framework.  In the Panel's view, tariff
preferences should not be lightly assumed to be an appropriate means to achieve health objectives
under Article XX(b) because any tariff preference s deviating from obligations assumed in the
multilateral framework would necessarily have a direct and negative impact on the multilateral
system.  Even under the Enabling Clause, where tariff preferences are authorized within themultilateral framework as a deviation from Article I:1, paragraph 3(b) prohibits GSP schemes that
"constitute an impediment to the reduction or elimination of tariffs … on a most-favoured-nation
basis".
7.210  In light of its analysis in paragraphs 7.200-7.209, the Panel finds that the policy reflected in
the Drug Arrangements is not one designed for the purpose of protecting human life or health in the
European Communities and, therefore, the Drug Arrangements are not a measure for the purpose of
protecting human life or health under Article XX(b) of GATT 1994.  Nevertheless, the Panelconsiders it would be appropriate to go on to examine whether the measure is "necessary" within the
meaning of Article XX(b).
(b) Necessity of the measure
7.211  The Panel recalls the Appellate Body ruling in Korea – Various Measures on Beef  that "the
term 'necessary' refers, in our view, to a range of degrees of necessity.  At one end of this continuumlies 'necessary' understood as 'indispensable';  at the other end, is 'necessary' taken to mean as 'making
a contribution to'.  We consider that a 'necessary' measure is, in this continuum, located significantly
closer to the pole of 'indispensable' than to the opposite pole of simply 'making a contribution to".
413
In order to determine where the Drug Arrangements are situated along this continuum between"contribution to" and "indispensable", the Panel is of  the view that it should determine the extent to
which the Drug Arrangements contribute to the European Communities' health objective.  This
requires the Panel to assess the benefits of the Drug Arrangements in achieving the objective of
protecting life or health in the European Communities.
7.212  The Panel notes the Report of the Commission pursuant to Article 31 of Council Regulation
No.  2820/98 of 21 December 1998 applying a multiannual scheme of generalized tariff preferencesfor the period 1 July 1999 to 31 December 2001.  The assessment of the effects of the Drug
Arrangements in this report reveals that the pro duct coverage under the Drug Arrangements decreased
by 31 per cent from 1999 through 2001.  It also shows that the volume of imports from the beneficiary
countries under the Drug Arrangements decreased during the same period.  As the Panel understands
it, this decrease in product coverage and in imports from the beneficiaries is due to the reduction to
zero – or close to zero – of the MFN bound duty rates on certain products, including coffee
products.
414
7.213  The Panel considers that the above-referenced decreases in product coverage and depth of
tariff cuts reflect a long-term trend of GSP benefits decreasing as Members reduce their import tariffs
towards zero in the multilateral negotiations.  Given this decreasing trend of GSP benefits, the
contribution of the Drug Arrangements to the realization of the European Communities' claimed
health objective is insecure for the future.  To the Panel, it is difficult to deem such measure as
"necessary" in the sense of Article XX(b).  Moreover, given that the benefits under the Drug
Arrangements themselves are decreasing, the Panel cannot come out to the conclusion that the
"necessity" of the Drug Arrangements is closer to the pole of "indispensable" than to that of
"contributing to" in achieving the objective of protecting human life or health in the European
Communities.
                                                     
413 Appellate Body Report, Korea – Various Measures on Beef , para. 161.
414 Exhibit EC-24.WT/DS246/R
Page 146
7.214  A further point relevant to assessing the necessity of the measure under Article XX(b) is the
fact that the EC Regulation provides for no monitoring mechanism on the effectiveness of the Drug
Arrangements for protecting human life or heal th in the European Communities.  The European
Communities confirms that, while it monitors the impact of the Drug Arrangements on the drug-
affected beneficiary countries, it has no monitoring mechanism relating to the impact of this measureon the protection of human life or health in the European Communities.  In the Panel's view, the level
of necessity of a measure must be linked to its effectiveness in achieving its objectives.  Given that the
European Communities has not considered it necessary to monitor and assess the effectiveness of the
Drug Arrangements in achieving its health objective, it is difficult to assume that the level of necessity
of this measure is closer to the pole of "indispensable" than to the pole of "contributing to".
7.215  The Panel also considers that it should examine the temporary suspension mechanism in EC
Regulation No. 2501/2001.  The Panel notes that Article 26 of this same Regulation provides anumber of bases for temporary withdrawal of prefer ential arrangements.  The reasons for suspension
include, inter alia , the practice of slavery or forced labour, violations of labour standards as defined in
the relevant ILO Conventions, shortcomings in customs controls on export or transit of drugs, unfair
trading practices and the infringement of the objectives of certain fishery conservation conventions.
This signifies that the Drug Arrangements and other preferential trade arrangements can be suspendedfor any one of these reasons at any time, regardless of the seriousness of the drug problem in the
country concerned.  Given this fact, it is difficult to see how the Drug Arrangements can be seen to be
a "necessary" means to achieve such an important objective as the protection of human life or health.
7.216  Assuming a beneficiary country under the Drug Arrangements was not ensuring sufficient
customs controls on export of drugs, or was infringing the objectives of an international fisheriesconservation convention, the European Communities could then suspend the tariff preferences under
the Drug Arrangements to this country, for reas ons unrelated to protecting human life or health.
Given that this beneficiary would be a seriously drug-affected country, the suspension of the tariff
preferences would arrest the European Communiti es' support to alternative development in that
beneficiary and therefore also stop efforts to reduce the supply of illicit drugs into the EuropeanCommunities.  The whole design of the EC Regulation does not support the European Communities'
contention that it is "necessary" to the protection of human life and health in the European
Communities, because such design of the measure does not contribute sufficiently to the achievement
of the health objective.
7.217  The European Communities confirms that whil e Myanmar is one of the world's leading
producers of opium, it is not necessary to separately include this country under the Drug
Arrangements since it is already accorded preferential tariff treatment as a least-developed country.The Panel notes that the European Communities has suspended tariff preferences for Myanmar.  The
Panel notes, moreover, that EC Regulation 2501/2001 provides:  the "[t]emporar y withdrawal of tariff
preferences in respect of imports of products originating in Myanmar should remain in force".
415
7.218  Recalling that the European Communities conf irms that it is required to continue its
suspension of tariff preferences for Myanmar through the expiration of the EC Regulation on31 December 2004, the Panel notes that any of the 12 beneficiaries is also potentially subject to
similar suspension under the same Regulation, regardless of the seriousness of the drug problems in
that country.  With one or more of the main drug-producing or trafficking countries outside the
scheme, it is difficult to see how the Drug Arrangements are in fact contributing sufficiently to the
reduction of drug supply into the European Communities' market to qualify as a measure necessary toachieving the European Communities' health objective.
7.219  In order to consider where the Drug Arrangements are situated along the continuum between
"contributing to" and "indispensable", the Panel considers that it should also examine whether there
                                                     
415 Council Regulation (EC) No. 2501/2001, Preamble (23).WT/DS246/R
Page 147
are less WTO-inconsistent or less trade-restrictive measures reasonably available to the European
Communities that would achieve the same objective.416
7.220  The Panel notes the European Communities' arguments that it is not aware of any less
trade-restrictive alternatives and that extending the preferences to all developing countries would
make the Drug Arrangements much less effective.  The European Communities also argues that the
provision of financial assistance is not a true alternative to tariff preferences because, without market
access, the alternative development would not be sustainable.417
7.221  The Panel also notes India's argument that financial and technical assistance, combined with
initiatives consistent with WTO obligations, are reasonably available alternatives to the European
Communities.  In the view of the Panel, such initiatives could include, for example, GSP schemes or
MFN tariff reductions that cover products of particular export interest to drug-affected countries.  In
fact, the preamble to the Agreement on Agriculture calls for WTO Members to provide greater marketaccess on "[agricultural] products of particular importance to the diversification of production from
the growing of illicit narcotic crops".
7.222  The Panel thus considers that at least one, less-inconsistent alternative is available to the
European Communities to achieve its health objective, that of financial and technical assistance
combined with multilaterally negotiated tariff reductions that provide sufficient tariff reductions onproducts of export interest to drug-affected countries.  While the European Communities states that
tariff reductions, offered more generally, would dilute the effect of the preferences to the beneficiary
countries, the European Communities has not demonstrated to the satisfaction of the Panel that such
alternatives are not reasonably available to it and would not achieve the equivalent effect as the Drug
Arrangements.  To the Panel, multilaterally negotiated tariff reductions on products for which thedrug-affected countries have a real export interest would provide equivalent benefits to these
countries.  After all, such an approach to taking care of the interests of a certain group of countries
was already sanctioned in the Agreed Conclusions for the least-developed countries.
418
7.223  Based on the analysis in paragraphs 7.211-7.222, the Panel finds that:  (i) the decrease in
benefits under the Drug Arrangements does not support a finding that the measure is closer to the poleof "indispensable" than to that of "contributing to";  (ii) the temporary withdrawal mechanism, as well
as its application to Myanmar, constitute an element of insecurity and do not contribute sufficiently to
the achievement of the health objective;  and (iii) the European Communities has not demonstrated
that no less WTO-inconsistent alternative measure is reasonably available to it.  Accordingly, the
Panel finds that the Drug Arrangements are not "necessary to protect human … life or health", in
accordance with Article XX(b) of GATT 1994.
7.224  Despite these findings, the Panel considers it would be appropriate to go on to examine
whether the application of the Drug Arrangements is consistent with the chapeau of Article XX.
(c) "Chapeau"
7.225  Turning to the "chapeau" of Article XX, the Panel notes that it requires that health measures
"not [be] applied in a manner which would constitute a means of arbitrary or unjustifiable
discrimination between countries where the same conditions prevail".  In this respect, the Panel recallsthe Appellate Body's analysis in US – Shrimp  regarding the constitutive elements of the concept of
"arbitrary or unjustifiable discrimination between countries where the same conditions prevail":
                                                     
416 Appellate Body Report, Korea – Various Measures on Beef , paras. 164-166.
417 Replies to Panel Questions to EC, No. 52
418 Agreed Conclusions, TD/B/330, Section V, para. 2.WT/DS246/R
Page 148
"In order for a measure to be applied in a manner which would constitute 'arbitrary or
unjustifiable discrimination between countries where the same conditions prevail',
three elements must exist.  First, the application of the measure must result in
discrimination.  As we stated in US – Gasoline , the nature and quality of this
discrimination is different from the discrimination in the treatment of products whichwas already found to be inconsistent with one of the substantive obligations of the
GATT 1994, such as Articles I, III or XI.  Second, the discrimination must be
arbitrary  or unjustifiable  in character.  …  Third, this discrimination must occur
between countries where the same conditions prevail ".
419
7.226  In line with this statement by the Appellate Body, the Panel will examine the consistency of
the Drug Arrangements with the chapeau.
7.227  On what constitutes discrimination under the chapeau of Article XX, the Panel further recalls
the Appellate Body statement in US – Shrimp  that "discrimination results not only when countries in
which the same conditions prevail are differently treated, but also when the application of a measure
at issue does not allow for any inquiry into the ap propriateness of the regulatory programme for the
conditions prevailing in those exporting countries".420  Applying these standards for determining
discrimination under the chapeau, the Panel notes the following.
7.228  First, the Panel notes the European Communities' argument that the assessment of the gravity
of the drug issue is based on available statistics on the production and/or trafficking of drugs in each
country.  The Panel notes, however, from the statistics provided by the European Communities itself
in support of its argument that the 12 beneficiaries are the most seriously drug-affected countries, that
the seizures of opium and of heroin in Iran are substantially higher than, for example, the seizures ofthese drugs in Pakistan throughout the period 1994-2000.
421  Iran is not covered as a beneficiary under
the Drug Arrangements.  Such treatment of Iran, a nd possibly of other countries, in the view of the
Panel, is discriminatory.  Bearing in mind the well- established rule that it is for the party invoking
Article XX to demonstrate the consistency of its measure with the chapeau, the Panel notes that the
European Communities has not provided any justification for such discriminatory treatment vis-à-vis
Iran.  Moreover, the European Communities has not shown that such discrimination is not arbitrary
and not unjustifiable as between countries where the same conditions prevail.
7.229  Second, the Panel also notes, based upon statistics provided by the European Communities,
that seizures of opium in Pakistan were 14,663 kilograms in 1994, as compared to 8,867 kilograms in
2000.  Seizures of heroin in Pakistan were 6,444 kilograms in 1994 and 9,492 kilograms in 2000.422
The overall drug problem in Pakistan in 1994 and thereafter was no less serious than in 2000.  ThePanel considers that the conditions in terms of the seriousness of the drug problem prevailing inPakistan in 1994 and thereafter were very similar to those prevailing in Pakistan in the year 2000.
Accordingly, the Panel fails to see how the application of the same claimed objective criteria justified
the exclusion of Pakistan prior to 2002 and, at the same time, its inclusion as of that year.  And, given
that the Panel cannot discern any change in the criteria used for the selection of beneficiaries under
the Drug Arrangements since 1990, the Panel cannot conclude that the criteria applied for theinclusion of Pakistan are objective or non-discriminatory.  Moreover, the European Communities has
provided no evidence on the existence of any such criteria.
                                                     
419 Appellate Body Report, US – Shrimp , para. 150.
420 Appellate Body Report, US – Shrimp , para. 165.
421 First written submission of the European Communities, para. 123.  In this regard, the Panel recalls
that, according to the European Communities, its inclusion of Pakistan in the Drug Arrangements is due to the
seriousness of drug trafficking, based on statistics of drug seizures, not of drug production.  First writtensubmission of the European Communities, para. 136.
422 Ibid.WT/DS246/R
Page 149
7.230  The Panel recalls the European Communities' argument that production of opium in
neighbouring Afghanistan was revived following the events of 11 September 2001 due to the collapse
of the Taliban regime.  According to the Europ ean Communities, the ban imposed by the Taliban on
drug production in 2001 resulted in a substantial decrease in opium production in that year but, with
the collapse of the Taliban, and despite a new ban imposed by the new government in January 2002,most opium poppy fields had already started to spr out and the harvest in 2002 of this crop regained
the pre-2001 levels.  Consequently, the European Communities argues, these changes in Afghanistan
were expected to have a considerable impact on Pakistan.
7.231  Despite these arguments, the Panel notes that the situation affecting Pakistan has been serious
at least since 1994, including during the period before the Taliban banned drug production in 2001.
Moreover, the European Communities' argument that the reimposition of a ban by the government in
January 2002 could not prevent the production of opium poppies in that year does not explain why theban could not work in subsequent years.  Yet, as the Panel understands it, Pakistan will continue to be
a beneficiary through at least the end of 2004.
7.232  Given the European Communities' unconvincing explanations as to why it included Pakistan
in the Drug Arrangements in 2002 and the fact that Iran was not included as a beneficiary, the Panel is
unable to identify the specific criteria and the objectivity of such criteria the European Communitieshas applied in its selection of beneficiaries under the Drug Arrangements.
7.233  The Panel notes that the European Communities has not provided any evidence on the
existence of procedures or criteria, whether published or other, relating to the periodic selection of
beneficiaries under the Drug Arrangements.  While the European Communities provided a description
of its selection process during this litigation, stating that it is based on the "overall assessment of thegravity of the drug problem in each developing country in accordance with objective criteria"
423,  and
also referred to UN statistics on drug production and seizures, the Panel has no evidence before it to
identify whether or not the European Communities actually conducted a selection process as
described by the European Communities and whether such selection process, if it occurred, was
actually based upon these UN statistics.
7.234  The Panel finds no evidence to conclude that the conditions in respect of drug problems
prevailing in the 12 beneficiary countries are the same or similar, while the conditions prevailing in
other drug-affected developing countries not covered by any other preferential tariff schemes are not
the same as, or sufficiently similar to, the prevailing conditions in the 12 beneficiary countries.
7.235  Based on its analysis in paragraphs 7.225-7.234, the Panel finds that the European
Communities has not demonstrated to the Panel's satisfaction that the application of the Drug
Arrangements, with the exclusion of Iran and the inclusion of Pakistan, does not constitute arbitraryand unjustified discrimination between countries where the same conditions prevail.  The lack of
evidence to that effect makes it impossible for th e Panel to assess the justifiability and non-
arbitrariness of the measure.  For these reasons, the European Communities has not established to the
Panel's satisfaction that the application of the measure does not constitute "a means of arbitrary or
unjustifiable discrimination between countries where the same conditions prevail".
4. Summary of findings on Article XX
7.236  For the reasons discussed in paragraphs 7.195-7.235, the Panel finds that the European
Communities has not demonstrated that:  (a) the Drug Arrangements are a measure designed for the
purpose of protecting human life or health in the European Communities;  or that (b) the Drug
Arrangements are "necessary" for the protection of human life or health in the EuropeanCommunities.  Consequently, the Panel finds that the Drug Arrangements are not provisionally
                                                     
423 First written submission of the European Communities, para. 116.WT/DS246/R
Page 150
justifiable under Article XX(b).  The Panel also finds that the European Communities has not
demonstrated that the Drug Arrangements are not being applied in a manner constituting arbitrary or
unjustifiable discrimination between countries where the same conditions prevail.
VIII.  CONCLUSIONS AND RECOMMENDATIONS
8.1 The Panel concludes as follows:
(a) India has the burden of demonstrating that the European Communities' Drug
Arrangements are inconsistent with Article I:1 of GATT 1994;
(b) India has demonstrated that the European Communities' Drug Arrangements are
inconsistent with Article I:1 of GATT 1994;
(c) the European Communities has the burden of demonstrating that the Drug
Arrangements are justified under paragraph 2(a) of the Enabling Clause;
(d) the European Communities has failed to demonstrate that the Drug Arrangements are
justified under paragraph 2(a) of the Enabling Clause;
(e) the European Communities has failed to demonstrate that the Drug Arrangements are
justified under Article XX(b) of GATT 1994;
(f) under Article 3.8 of the DSU, in cases where there is infringement of the obligations
assumed under a covered agreement, the action is considered prima facie to constitutea case of nullification of benefits under that agreement.  Accordingly, because the
Drug Arrangements are inconsistent with Article I:1 of GATT 1994 and not justified
by Article 2(a) of the Enabling Clause or Article XX(b) of GATT 1994,  the
European Communities has nullified or impaired benefits accruing to India under
GATT 1994.
8.2 The Panel recommends that the Dispute Settlement Body request the European Communities
to bring its measure into conformity with its obligations under GATT 1994.
8.3 The Panel recalls India's request to the Panel to suggest to the European Communities that it
bring its measure into conformity with its obligations under GATT 1994 by obtaining a waiver.  The
Panel further recalls the European Communities' statement that it has requested a waiver and that thiswaiver request is still pending.  In light of the fact that there is more than one way that the European
Communities could bring its measure into conformity with its obligations under GATT 1994 and the
fact that the European Communities has requested a waiver which is still pending, the Panel does not
consider it appropriate to make any particular suggestions to the European Communities as to how the
European Communities should bring its inconsistent measure into conformity with its obligations
under GATT 1994.
8.4 As a final concluding remark, the Panel notes that, in their written submissions and in the
course of the hearings, the beneficiary countries of the Drug Arrangements have repeatedly
emphasized the benefits of sustainable development for these countries derived from the operation of
the Drug Arrangements.  The Panel sympathizes with these concerns.  At the same time, the Panel
recalls that its terms of reference are not to determine the benefits to these countries derived from the
Drug Arrangements, but to examine India's claim and the European Communities' defence regardingArticle I:1 of GATT 1994 and the Enabling Clause.WT/DS246/R
Page 151
IX. DISSENTING OPINION BY ONE MEMBER OF THE PANEL
9.1 The Enabling Clause, like the 1971 Waiver, is a carefully negotiated decision by the
CONTRACTING PARTIES to permit developed countries to afford preferential tariff treatment to
imports from developing countries so that the multilateral trading system can provide equivalent
benefits to developing and developed countries in reality as well as textually.  The legal mechanismchosen to accomplish this, first in the 1971 Waiver and subsequently in the Enabling Clause, is to
restore the right to developed countries to offer more favourable tariff treatment to exports from
developing countries, with the expectation that the exercise of the right would result in development
and an increase in exports from developing countries, factors reflected in paragraph 3 of the Enabling
Clause.  The preferences authorized under the Enabling Clause are a continuation of the "positive
efforts designed to ensure that developing countries, and especially the least-developed among them,
secure a share in the growth in international trade commensurate with the needs of their economic
development".
424  They complement Part IV of the GATT 1994.425
9.2 As explained below, the CONTRACTING PARTIE S did not create a general rule-exception
relationship between the Enabling Clause and Article I.  In the Enabling Clause the CONTRACTING
PARTIES in effect made the 1971 Waiver permanent, expanded the scope of authorized preferences
to address other aspects of the "system" developed within UNCTAD and added several importantfactors related to development and trade liberalization.  The text of the Enabling Clause, its context
(including the 1971 Waiver) and preparatory work make clear that it is the applicable WTO rule
regarding tariff preferences for developing countries.   Consequently, it is my view that India's claim
should have been brought under the Enabling Clause.
9.3 In addition, this dispute poses a dilemma rega rding how the Panel should view its terms of
reference, when they seem to be broader than the claim made by the complaining party.  This issue
will be addressed following the discussion of the Enabling Clause.
9.4 The 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller
Participation of Developing Countries
426 (the formal title of the Enabling Clause) is a result of joint
action by the CONTRACTING PARTIES during the Tokyo Round of multilateral trade negotiations.The Decision enables a Member to accord certain special and differential treatment to developing
countries and authorizes limited forms of cooperation among developing countries.  The Enabling
Clause is a direct and immediate successor to the 1971 Waiver
427, which permitted a generalized
system of tariff preferences but was about to expire.  There is no available negotiating history or
explanation of the Enabling Clause. However, the 1971 Waiver and its history help to understand the
object and purpose of the Enabling Clause and its relationship to Article I.
9.5 In the late 1960s and 1970s developing countries argued in UNCTAD that the benefits
expected to result from freer trade had not occurred and that a new approach was needed.428  Eight
years of discussions between developed and deve loping countries followed in UNCTAD and led to
the 1971 Waiver permitting the implementation of the generalized system of preferences.  The
                                                     
424 Preamble, Agreement Establishing the World Trade Organization.
425 It is understood that the value of these tariff preferences has lessened because of tariff reductions
resulting from multilateral trade negotiations and regi onal arrangements, in particular.  Nevertheless,
generalized tariff preferences remain an important type of special and differential treatment.
426 L/4903, BISD 26S/203-205.
427 L/3545, BISD 18S/24-26.
428 Several representatives made statements at the GATT Council meeting such as "economically
unequal countries had to be treated unequally" (Peru) and "equal rules for unequal partners did not bring aboutequality of trading opportunities" (Israel).  C/M/69.WT/DS246/R
Page 152
representative of the prospective donor countries described it as "a new experiment" and "a great step
forward, a historic move".429
9.6 The 1971 Waiver, which is expressly cross-referenced in paragraph 2(a) and footnote 3 of the
Enabling Clause, was created to permit a rebalancing, to improve trade benefits for the many
developing countries that had joined the multilateral trading system during the 1960s and 1970s and tosupplement Part IV of the General Agreement.  The Waiver implemented a carefully negotiated
"system"
430, "scheme"431 or "arrangements"432 that permitted a range of special and differential
treatment and that was expected to allow developing countries also to reap the benefits of market
access opportunities.
9.7 The uniqueness and significance of the agreed action was noted by many representatives in
the GATT Council meeting that considered the developed countries' request for a waiver of their
Article I obligations so that they could implement the UNCTAD generalized system of preferences.The approval of a system of trade preferences was described as "an historical event"
433, "an historic
event"434, "considerable potential which the Scheme embodied for the improvement in the conditions
governing international trade of developing countries"435, a decision of "enormous importance, not
only for the future of international trade relations, but in terms of the interpretation and meaning of
the General Agreement itself"436, of "historic importance"437, "an historic occasion in the field of
international trade relations, representing at the same time an important evolutionary step in the
history of GATT".438  The representative of Greece described it as a "movement of solidarity for the
benefit of world trade".439  The representative from Uruguay noted that "it was obvious that after this
waiver was voted upon, the General Agreement would be different from what it had been so far."440
These statements reflect the change anticipated an d an evolving discussion within the United Nations
system about the then existing and potential trade rules and the developing countries.441
9.8 The developed countries were asked by UNCTAD to obtain the necessary legislative or other
sanction in order to implement the generalized system of preferences.442 In the GATT, they chose to
request a waiver of their Article I obligation443, as made possible by Article XXV:5.  They applied for,
                                                     
429 C/M/69.
430 The Waiver is entitled "Generalized System of Preferences". The same term was used by UNCTAD.
See Resolution 21(II), Preamble and para. 1 and Statement by the Group of 77 in Part II.B of the Charter of
Algiers.
431 Statement of the Chairman, C/M/69.
432 OECD, Report by the Special Group on Trade with Developing Countries of the Organisation for
Economic Cooperation and Development, 29 Jan. 1968. OECD also referred to "treatment".
433 Statement of India, C/M/69.
434 Statement of Argentina, C/M/69.
435 Statement of Jamaica, C/M/69.
436 Statement of Uruguay, C/M/69.
437 Statement of Greece, C/M/69.
438 Statement of the United Arab Republic, C/M/69.
439 C/M/69.
440 C/M/69.
441 See, e.g., Article 30 of its Draft Articles on Most-Favoured-Nation Clauses, which were submitted
to the United Nations General Assembly between the 1971 Waiver and the 1979 Enabling Clause by the
International Law Commission:  "The present articles are without prejudice to the establishment of new rules ofinternational law in favour of developing countries."
442 UNCTAD Trade and Development Board, Decision 75(S-IV), Generalized System of Preferences.
443 No country has a right to MFN treatment unless a country with which it trades has undertaken an
Article I obligation toward it. Given Article I, the pref erence-giving countries had an obligation to accord MFN
treatment to all the GATT contracting parties and the other contracting parties had rights within the limits of that
clause.
Only the developed or preference-giving countries had obligations that would be contravened by the
offer of preferences. Under the waiver, where the "provi sions of Article I shall be waived", the contractingWT/DS246/R
Page 153
and were granted, a ten-year waiver from the "provisions of Article I" to implement tariff preferences
as described in the terms of the Waiver.444
9.9 This lifting of the Article I obligation of the preference-granting countries was widely
understood and intended.  The Chairman of the GATT Council had introduced the matter by stating
that the application was for a waiver "from the obligations under Article I of the GeneralAgreement".
445  The spokesman for the prospective preference-granting countries asked the GATT
Council to consider the proposed waiver "from the obligations under Article I of the General
Agreement so as to make possible the implementation of a system of generalized preferences".  He
described it as a "departure from the basic most-favoured-nation principle incorporated in Article I of
the General Agreement".446 
9.10 The representative of Turkey called it a "deviation from the most-favoured-nation
principle".447  If there had been a dispute under the waiver, the complaining party would not have
claimed under Article I because its rights under that provision had been relinquished, as had the
contractual MFN obligation of the preference-giving country.448
9.11 As was true regarding the 1971 Waiver, the object and purpose of the Enabling Clause are to
benefit developing countries and to promote their trade.  The language of the Clause describes actions
by the developed, or donor, countries that grant the preferences.  It enables on a permanent basisMembers to accord "differential and more favourable treatment" to developing countries without
according the same treatment to other contracting pa rties.  Four types of treatment are authorized,
including preferential tariff treatment as described in the 1971 Waiver.  Members maintain discretion
to determine, for example, whether to offer tariff preferences, the scope of product coverage and the
applicable tariff levels.  All of these prerogatives had been carefully negotiated in UNCTAD and werereflected in the texts of the 1971 Waiver and the Enabling Clause.   
9.12 The Enabling Clause continues the relationship between trade preferences for developing
countries and Article I that was agreed in UNCTAD and in the 1971 Waiver.  There is no evidence
that the CONTRACTING PARTIES intended to alter this relationship in 1979. A new Decision was
agreed primarily because GATT practice limited the duration of Article XXV waivers.  The legalnature of the Enabling Clause and the proper reading of the word "notwithstanding" in its paragraph 1
result from this very particular history and from the link between the Enabling Clause and the 1971
Waiver.
9.13 The words "Notwithstanding the provisions of Article I of the General Agreement …"
indicate the relationship between the Enabling Clause and Article I.  "Notwithstanding" means
nevertheless or in spite of a hindrance of some kind
449, in this case in spite of the commitments
Members had made under Article I. It is a traditional legal term that, even when standing alone, has a
                                                                                                                                                                    
parties relinquished their right to demand MFN treatment for their products when the preference giving country
complied with the conditions of the waiver.
444 Decision of 25 June 1971. The waiver had a ten year duration and was granted only "to the extent
necessary" to implement the preferential tariff treatment.
445 C/M/69, para. 1.
446 C/M/69.  The preference giving countries had adopted the notion of a "departure" from Article I in
OECD, Report by the Special Group on Trade with Developing Countries, Part Two, para. 1. (1968).
447 C/M/69.  Moreover, the countries affected by this system of preferences agreed not to invoke their
rights to MFN treatment.
448 In EC – Bananas III , the Appellate Body considered, among many other issues, the scope of the
EC's 1994 waiver from the "provisions of paragraph 1 of Article I … to the extent necessary". In analyzing the
matter, the Appellate Body concluded that Article I.1 was waived so considered not Article I but whether the EC
had complied with the conditions of the Lomé waiver. Paras. 164 et seq.
449 Notwithstanding is defined as "in spite of, without regard to or prevention by".  The New Shorter
Oxford English Dictionary , 4th Edition, p. 1947.WT/DS246/R
Page 154
long history.  The word derives from the Latin term  "non obstante", indicating that the king or ruler
had granted a licence, charter or some other right despite the law, not as an exception to the law.  This
certainly was the relationship envisaged by the preference-giving countries, as stated in the OECD
report450 and during the meeting of the GATT Council that had considered the 1971 Waiver.  Again,
there is no indication that the CONTRACTING PART IES intended to alter this relationship in 1979.
9.14 Such a reading of "notwithstanding" does not undermine the WTO goals of an improved
multilateral trading system and economic development.451  Paragraph 3 and footnote 3 of the Enabling
Clause insert factors that will promote the trade of developing countries yet protect the multilateral
system.
9.15 While the Appellate Body has at times followed the traditional rule-exception analysis, it has
also recognized that legal relationships can differ from, and can be more complex than, the traditional
general rule (e.g., Article I or III) – exception (e.g., Article XX or XXIV) relationship.  EC –
Hormones452 and Brazil – Aircraft 453 are illustrative.  As explained above, the relationship between
the Enabling Clause and Article I is not a general rule-exception relationship.  The Enabling Clause
remains in the nature of a waiver from developed countries' obligations under Article I although,
because the Enabling Clause is permanent, it cannot be covered by Article XXV:5. The
CONTRACTING PARTIES, through their 1979 Decision, continued the then existing relationshipbetween the Enabling Clause and Article I.
9.16 Another important consideration is that th e CONTRACTING PARTIES expected and desired
that the right to grant tariff preferences be exercised.  That expectation continues.  Although the
granting of tariff preferences under the Enabling Clause is optional and a matter for each Member to
decide and is not an obligation, it was understood that only simultaneous, concerted action by mostdeveloped countries would create the trade benefits intended and discussed in UNCTAD and later in
the GATT.
454  The discussions in UNCTAD concluded with  the expectation of simultaneous offerings
of special and differential tariff treatment by developed countries, whose joint impact would be to
increase significantly the trade benefits available to developing countries.455  Consequently neither the
Enabling Clause nor the 1971 Waiver were limited exceptions.  Both are major changes in approachand intended to have a major change for the good in the effect of trade rules.
456
9.17 In this sense, the Enabling Clause permits a series of individual, preferential measures each of
which contributes to the goal of better market access for exports from developing countries and,
consequently, increased world trade. In its anticipation of simultaneous actions the Enabling Clause is
                                                     
450 The Report refers to the "rights granted to them by any General Agreement waiver" (para. 14) and
states that the "special tariff treatment was a waiver from the basic General Agreement on Tariffs and Trade ruleand therefore not an obligation" (para. 35).
451 Paragraph 3 of the Enabling Clause is particularly si gnificant.  It requires that preferential treatment
be "designed to facilitate and promote the trade of developing countries" and "respond effectively to thedevelopment, financial and trade needs of developing c ountries." Preferences may neither raise barriers to or
create undue difficulties for the trade of other Members nor constitute an impediment to broader MFNreductions or elimination of tariffs and other trade restrictions.
452 Appellate Body Report, EC – Hormones .  In both EC – Hormones  and EC – Sardines , the Appellate
Body found no general rule-exception relationship even though the word "except" was used in both Article 3.1
of the SPS Agreement and Article 2.4 of the TBT Agreement. As stated by the Appellate Body in EC –
Hormones , Article 3.1 "simply excludes from its scope of application the kinds of situations covered by
Article 3.3 … ."  Appellate Body Report, EC – Hormones , para. 104.
453 Appellate Body Report, Brazil – Aircraft .
454 The representative of Argentina mentioned the "basic assumption" that "all donor countries would
give preferences and thus share the burden".  C/M/69.
455 This contrasts with individual actions for domestic purposes under exceptions to Article I, such as
Article VI measures.
456 This contrasts with the somewhat limited derogation at issue in US – Wool Shirts and Blouses .WT/DS246/R
Page 155
more like the group action contemplated by Article II of GATT 1994457 than the individual action
described in many provisions of the WTO agreemen ts. Action under the Enabling Clause benefits the
trading system, in contrast to some other permitted individual actions, such as those under Article VI,
Article XIX, or even Article 3.3 of the SPS Agreement.458
9.18 Turning to the second issue, although India has couched its claim in somewhat ambiguous
and artful language, it is apparent from its submissions and from its statement at the oral hearing that
it has made a claim under Article I of GATT 1994 regarding an aspect of the European Communities'
tariff preferences programme for developing countries.  It considers the 1979 Enabling Clause an
exception to Article I and, as such, an affirmative defence. India argued in its first submission and
subsequently that the Drug Arrangements are not justified under the Enabling Clause.459  In contrast
the European Communities characterizes the Enabling Clause as an autonomous right, similar to
Article 3.3 of the SPS Agreement.
9.19 Given the terms of reference of this Panel, we are confronted with the dilemma of either
following the mandate from the Dispute Settlement Body and thereby considering a claim that India
says is not its position, or accepting the theory put forward by India in these proceedings and thereby
considering the Enabling Clause as a possible defence but not a claim as envisaged by the terms of
reference.  If we adopt the broader reading of the terms of reference, the Panel will add a claimregarding the Enabling Clause to India's case and will consider a claim that India says it is not
making.  Also, in deciding the scope of the "matter", the Panel must preserve the "rights and
obligations" of Members under the covered agreements
460, one of which is the Enabling Clause, and
must assess the applicability of the relevant covered agreements.461
9.20 The Dispute Settlement Body established this Panel with the standard terms of reference:  "To
examine, in the light of the relevant provisions of  the covered agreements cited by India in document
WT/DS246/4, the matter referred to the DSB by Indi a in that document, and to make such findings as
will assist the DSB in making the recommendations or in giving the rulings provided for in those
agreements."462  India had requested the DSB to establish a panel to examine whether the Drug
Arrangements, any implementing rules and regulatio ns, any amendments and their application "are
consistent with Article I:1 of GATT 1994 and the requirements set out in paragraphs 2(a), 3(a) and
3(c) of the Enabling Clause."463 While it appears that India made two claims (an Article I:1 claim and
an Enabling Clause claim), India's subsequent explanation of its request is limited to the MFN claim.
India calls the MFN issue its "material" claim.  It asserts that the Enabling Clause is an affirmative
defence – not a claim – and concludes that the European Communities has not complied with the
conditions of the Enabling Clause.464  In arguing that the Enabling Clause is an affirmative defence,
India must admit that it is not a claim and that its reference to the Enabling Clause is an argument inresponse to the anticipated defence.
                                                     
457 Article XXIV, considered an exception to Article I,  is a more limited form of joint action, which
often raises questions about the contribution of the Article XXIV arrangement to trade liberalization.
458 The Appellate Body described Article 3.3 of the SPS Agreement as an "autonomous right" in the EC
– Hormones dispute .  In disputes involving these Articles, the Appellate Body appears to begin its analysis not
with Article I or Article III but with the exception, the autonomous right or the specific agreement at issue.
459 Cf. the distinction between a claim and an argument as explained by the Appellate Body in EC –
Sardines , para. 280 and EC – Hormones , para. 156.
460 DSU, Article 3.2.
461 DSU, Article 11.
462 European Communities – Conditions for the Gr anting of Tariff Preferences to Developing
Countries , WT/DS246/5 (6 March 2003).
463 European Communities – Conditions for the Gr anting of Tariff Preferences to Developing
Countries , WT/DS246/4 (9 December 2002). Cf. India's Request for Consultations. WT/DS246/1 (12 March
2002).
464 Both parties made arguments about the Enabling Clause.WT/DS246/R
Page 156
9.21 The scope of India's claim is important becau se, under my analysis, India's claim should be
raised under the Enabling Clause.  If India's claim is limited to Article I – as India says – it has chosen
the wrong theory to characterize this matter and the complaint should be dismissed.  A panel may not
address legal claims falling outside its terms of reference and, to protect the rights of Members whose
measures are challenged, should not add claims and theories to those put forward by the complainingparty.
_______________