EUROPEAN COMMUNITIES – CONDITIONS FOR THE GRANTING OF TARIFF PREFERENCES TO DEVELOPING COUNTRIES
Document: Report of the Appellate Body
Date: 7 April 2004
Document codes: WT/DS246/AB/R
Complainant: India
Respondent: EU
Third parties: Bolivia, Plurinational State of, Brazil, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mauritius, Nicaragua, Pakistan, Panama, Paraguay, Peru, Sri Lanka, Venezuela, U.S.
Dispute stage: Appellate Body
Agreements cited: Art. I:1  GATT 1994

EUROPEAN COMMUNITIES – CONDITIONS FOR THE GRANTING
OF TARIFF PREFERENCES TO DEVELOPING COUNTRIES

AB-2004-1

Report of the Appellate Body

APPELLATE BODY

European Communities, Appellant
India, Appellee

Bolivia, Third Participant
Brazil, Third Participant
Colombia, Third Participant
Costa Rica, Third Participant
Cuba, Third Participant
Ecuador, Third Participant
El Salvador, Third Participant
Guatemala, Third Participant
Honduras, Third Participant
Mauritius, Third Participant
Nicaragua, Third Participant
Pakistan, Third Participant
Panama, Third Participant
Paraguay, Third Participant
Peru, Third Participant
United States, Third Participant
Venezuela, Third Participant

 AB-2004-1

 Present:

 Abi-Saab, Presiding Member
 Baptista, Member
 Sacerdoti, Member

I. Introduction
1. The European Communities appeals certain issues of law and legal inte rpretations developed
in the Panel Report, (the "Panel Report").
1 The Panel was established to consider a complaint by
India against the European Communities regardi ng the conditions under which the European
Communities accords tariff preferences to devel oping countries pursuant to Council Regulation (EC)
No. 2501/2001 of 10 December 2001 "applying a schem e of generalised tariff preferences for the
period from 1 January 2002 to 31 December 2004" (the "Regulation").2

1, 1 December 2003.
2Official Journal of the European Communities , L Series, No. 346 (31 December 2001), p. 1 (Exhibit
India-6 submitted by India to the Panel).

2. The Regulation provides for five preferential tariff "arrangements"
 3, namely:
(a) general arrangements described in Artic le 7 of the Regulation (the "General
Arrangements");
(b) special incentive arrangements for the protection of labour rights;
(c) special incentive arrangements for the protection of the environment;
(d) special arrangements for least-developed countries; and
(e) special arrangements to combat drug production and trafficking (the "Drug
Arrangements").
4
3. All the countries listed in Annex I to the Regula tion are eligible to receive tariff preferences
under the General Arrangements 5, which provide, broadly, for suspension of Common Customs
Tariff duties on products listed as "non-sensitive" and for reduction of Common Customs Tariff
ad valorem duties on products listed as "sensitive". 6 The General Arrangements are described in
further detail in paragraphs 2.4 and 2.5 of the Panel Report. Th e four other arrangements in the
Regulation provide tariff preferences in addition to those granted under the General Arrangements. 7
However, only some of the country beneficiaries of the General Arrangements are also beneficiaries
of the other arrangements. Specifically, preferen ces under the special incentive arrangements for the
protection of labour rights and the special in centive arrangements for the protection of the
environment are restricted to those countries that "are determined by the European Communities to
comply with certain labour [or] environmental policy standards" 8, respectively. Preferences under the
special arrangements for least-developed countri es are restricted to cer tain specified countries. 9
Finally, preferences under the Drug Arrangements are provided only to 12 predetermined countries,
namely Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua,
Pakistan, Panama, Peru, and Venezuela.
10

3Regulation, Art. 1.2.
4Ibid.
5Panel Report, para. 2.4.
6Regulation, Arts. 7.1-7.2.
7Ibid., Arts. 8-10. For example, these tariff prefer ences include further reductions in the duties
imposed on certain "sensitive" products.
8Panel Report, para. 2.3. See Regulation, Arts. 14 and 21, and Annex I (Columns E and G).
9Regulation, Annex I (Column H).
10Ibid. (Column I); Panel Report, paras. 2.3 and 2.7.

4. India is a beneficiary of the General Arrangements but not of the Drug Arrangements, or of
any of the other arrangements established by the Regula tion. In its request for the establishment of a
panel, India challenged the Drug Arrangements as well as the special incentive arrangements for the
protection of labour rights and the environment. 11 However, in a subsequent meeting with the
Director-General regarding the composition of th e Panel—and later in writing to the European
Communities—India indicated its decision to limit its complaint to the Drug Arrangements, while
reserving its right to bring additional complaints regarding the two "special incentive arrangements".12
Accordingly, this dispute concerns only the Drug Arrangements.
5. The Panel summarized the effect of the Drug Arrangements as follows:
The result of the Regulation is th at 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 the Drug 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,
1704 10 91 and 1704 10 99, the 12 beneficiary countries are granted
duty-free access to the European Comm unities' market, while all
other developing countries are entitled only to reductions in the
duties applicable under the Common Customs Tariff .
 13 (original
italics)
6. India requested the Panel to find that "the Drug Arrangements set out in Article 10" 14 of the
Regulation are inconsistent with Article I:1 of the General Agreement on Tariffs and Trade 1994
(the "GATT 1994") and are not justified by th e Decision on Differential and More Favourable
Treatment, Reciprocity, and Fuller Participation of Developing Countries (the "Enabling Clause"). 15
In the Panel Report, circulated to Members of the World Trade Organization (the "WTO") on 1
December 2003, the Panel concluded that:

11Request for the establishment of a panel by India, WT/DS246/4, 9 December 2002, p. 2.
12Panel Report, para. 1.5.
14Ibid., para. 3.1 (referring to India's first written submission to the Panel, para. 67).
15GATT Document L/4903, 28 November 1979, BISD 26S/203 (attached as Annex 2 to this Report).

(a) India has the burden of demonstrating that the European
Communities' Drug Arrangement s are inconsistent with
Article I:1 of GATT 1994;
(b) India has demonstrated that the European Communities'
Drug Arrangements are inconsis tent with Article I:1 of
GATT 1994;
(c) the European Communities h as the burden of demonstrating
that the Drug Arrangements are justified under
paragraph 2(a) of the Enabling Clause; [and]
(d) the European Communities has failed to demonstrate that the
Drug Arrangements are justified under paragraph 2(a) of the
Enabling Clause[.]
16
The Panel also concluded that the European Comm unities had "failed to demonstrate that the Drug
Arrangements are justified under Article XX(b) of GATT 1994". 17 Finally, the Panel concluded,
pursuant to Article 3.8 of the Understanding on Rules and Procedures Governing the Settlement of
Disputes (the "DSU"), that "because the Drug Arrangeme nts 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."18
7. On 8 January 2004, the European Communities notified the Dispute Settlement Body of its
intention to appeal certain issues of law covered in the Panel Report and certain legal interpretations
developed by the Panel, pursuant to paragraph 4 of Article 16 of the DSU, and filed a Notice of
Appeal 19 pursuant to Rule 20 of the Working Procedures for Appellate Review (the " Working
Procedures").20 On 19 January 2004, the European Comm unities filed its appellant's submission. 21
On 30 January 2004, Pakistan notified its inten tion to appear at the oral hearing as a third
participant.22 On 2 February 2004, India filed its appellee's submission. 23 On the same day, Costa
Rica, Panama, Paraguay, and the United States each filed a third participant's submission, and Bolivia,
Colombia, Ecuador, Peru, and Venezuela filed a jo int third participant's submission as the Andean
Community.24 Also on 2 February 2004, Brazil notified its intention to make a statement at the oral

16Panel Report, para. 8.1(a)-(d).
17Ibid., para. 8.1(e).
18Ibid., para. 8.1(f).
19Notification of an appeal by the European Comm unities, WT/DS246/7, 8 January 2004 (attached as
Annex 1 to this Report).
20WT/AB/WP/7, 1 May 2003.
21Pursuant to Rule 21 of the Working Procedures.
22Pursuant to Rule 24(2) of the Working Procedures.
23Pursuant to Rule 22 of the Working Procedures.
24Pursuant to Rule 24(1) of the Working Procedures.

hearing as a third participant, and Mauritius notified its intention to appear at the oral hearing as a
third participant.25 Finally, on 2 February 2004, El Salv ador, Guatemala, Honduras, and Nicaragua
jointly notified their intention to make a statem ent at the oral hearing as third participants. 26 On 4
February 2004, Cuba notified its intention to ap pear at the oral hearing as a third participant. 27 By
letter dated 16 February 2 004, Pakistan submitted a request to make a statement at the oral hearing. 28
No participant objected to Pakistan's request, which was authorized by the Division hearing the appeal
on 18 February 2004.29
8. The oral hearing in this appeal was held on 19 February 2004. The participants and third
participants presented oral arguments (with the ex ception of Cuba and Mauritius) and responded to
questions posed by the Members of the Division hearing the appeal.
II. Arguments of the Participants and Third Participants
A. Claims of Error by the European Communities – Appellant
1. The Relationship Between Article I:1 of the GATT 1994 and the Enabling
Clause
9. The European Communities argues that the Panel erred in finding that the Enabling Clause is
an "exception" to Article I:1 of the GATT 1994 an d in assigning to the European Communities the
burden of justifying the Drug Arrangements under the Enabling Clause. Furthermore, the European
Communities submits, the Panel erred in finding that Article I:1 applies to measures covered by the
Enabling Clause. The European Communities requ ests the Appellate Body to reverse the Panel's
consequent finding that the Drug Arrangements are inconsistent with Article I:1 of the GATT 1994
and, because India made no claim with respect to the Enabling Clause, to refrain from assessing the
Drug Arrangements under the Enabling Clause.
10. According to the European Communities, the Panel's main reason for deciding that the
Enabling Clause is an exception to Article I:1 was that the Enabling Clause does not provide "positive

25Pursuant to Rule 24(2) of the Working Procedures.
26Ibid.
27Pursuant to Rule 24(4) of the Working Procedures.
28Ibid.
29Pursuant to Rule 27(3)(c) of the Working Procedures . The Director of the Appellate Body
Secretariat advised Pakistan and the other participants in the appeal of the Division's decision by letter dated
18 February 2004.

rules establishing obligations in themselves".
30 In the European Communities' view, however, the fact
that developed countries are not legally obliged to implement schemes pursu ant to the Generalized
System of Preferences ("GSP") does not mean that the Enabling Clause does not impose positive
obligations, or that it is an exception to Article I:1. The European Co mmunities argues that the
Panel's reasoning suggests that, if a WTO provisi on applies only when a WTO Member takes a
particular step that it is not obliged to take, that provision cannot create a positive obligation and must
be an exception. According to th e European Communities, this test is not consistent with Appellate
Body decisions and "would lead to manifestly absurd results". 31 For example, the European
Communities contends, this test would mean that the following provisions do not impose positive
rules establishing obligations in themselves, despite contrary reasoning in previous Appellate Body
decisions: Article 27.4 of the Agreement on Subsidies and Countervailing Measures (the
"SCM Agreement "); Article 3.3 of the Agreement on the Application of Sanitary and Phytosanitary
Measures (the "SPS Agreement "); Article 2.4 of the Agreement on Technical Barriers to Trade; and
Article 6 of the Agreement on Textiles and Clothing .32 According to the European Communities,
Articles VI and XIX of the GATT 1994 would al so be rendered exceptions under the Panel's
reasoning, contrary to well-established GATT and WTO panel practice.
11. The European Communities suggests that the Panel should have begun its analysis by
examining the ordinary meaning of the word "notwithstanding" in the Enabling Clause. This ordinary
meaning, in the view of the European Communitie s, does not compel the Panel's finding that the
Enabling Clause is an "exception" to Article I:1. This is apparent from the dissenting opinion in the
Panel Report and the Panel's own recognition that the definition of "notwithstanding" is not
dispositive of this question. Therefore, the Eu ropean Communities argues, in accordance with the
basic rules of treaty interpretation in Article 31 of the Vienna Convention on the Law of Treaties (the
"Vienna Convention ")
 33, the Panel should have proceeded to examine the relevant "content" 34,
context, and object and purpose of the Enabling Cl ause in order to identify the relationship between

30European Communities' appellant's submission, pa ra. 32 (quoting Panel Report, para. 7.35, itself
quoting Appellate Body Report, US – Wool Shirts and Blouses, p. 16, DSR 1997:I, at 337).
31Ibid., para. 34.
32Ibid., para. 35 (referring to Appellate Body Report, Brazil – Aircraft , paras. 134-141; Appellate
Body Report, EC – Hormones, paras. 97-104; Appellate Body Report, EC – Sardines, para. 275; and Appellate
Body Report, US – Wool Shirts and Blouses, pp. 12-17, DSR 1997:I, at 333-338).
33Done at Vienna, 23 May 1969, 1155 U.N.T.S. 331; 8 International Legal Materials 679.
34European Communities' appellant's submission, paras. 18 and 39, and heading 2.5.1.

the Enabling Clause and Article I:1. Instead, the European Communities observes, the Panel simply
"assumed" 35 that the Enabling Clause is an exception to Article I:1.
12. Turning to the content and context of th e Enabling Clause, the European Communities
submits that the Enabling Clause provides a compre hensive set of rules that positively regulate the
substantive content of GSP schemes, to the exclusi on of the rules in Article I:1 of the GATT 1994.
Specifically, the European Communities emphasizes th at the words "generaliz ed, non-reciprocal and
non discriminatory" in footnote 3 of the Enabling Cl ause are distinct from and are intended to replace
the most-favoured-nation ("MFN") obligation in Arti cle I:1. The European Communities also argues
that, according to the Panel's own reasoning, footnot e 3 should be interpreted in the context of
the Agreed Conclusions of the Special Committee on Preferences of the United Nations Conference
on Trade and Development (the "Agreed Conclusions") 36 and the submissions by developed countries
to that committee. As such, the detailed obligati ons created by paragraph 2(a), footnote 3, and
paragraph 3(c) of the Enabling Clause go far beyond "mere 'anti-abuse' safeguards". 37 The European
Communities contends that the Enabling Clause is unlike the chapeau of Article XX of the
GATT 1994, which neither regulates the substantive content of measures adopted by Members, nor
replaces the substantive rules from which Article XX derogates.
13. The European Communities reli es in support of its argument on the position of the Enabling
Clause within the GATT 1994 and the Marrakesh Agreement Establishing the World Trade
Organization (the " WTO Agreement "). Thus, the European Communities contends that if
paragraph 2(a) of the Enabling Clause were an exception to Article I:1, it would typically be found in
Article I, or immediately after that Article. This is not the case, however. The Enabling Clause is a
separate decision complementing Part IV of the GATT 1994, which is entitled "Trade and
Development". In the view of the European Communities, Part IV of the GATT 1994 and the
Enabling Clause cannot be "mere 'exception[s]' " to the GATT 1994. 38 Rather, the European
Communities argues, they constitute a "special regime" for developing countries to address
inequalities among the WTO Membership.39
14. The European Communities submits that its understanding of the relationship between
Article I:1 and the Enabling Clause is supported by the object and purpose of the Enabling Clause, in

36Attached as Annex D-4 to the Panel Report.
38Ibid., para. 51.
39Ibid.

accordance with the rules of treat y interpretation. The European Communities emphasizes that the
Enabling Clause is "the most concrete, comprehensive and important application"
 40 of the principle of
special and differential treatment. In the view of the European Communities, special and differential
treatment is "the most basic principle of the international law of development" 41, and it constitutes
lex specialis that applies to the exclusion of more general WTO rules on the same subject matter. In
concluding that the Enabling Clause is an "exception" to Article I:1, the Panel chose to "disregard" 42
this principle. Moreover, the European Commun ities argues, characterizing special and differential
treatment as an "exception" suggests that this principle "is discriminatory against the developed
country Members". 43 In fact, special and differential treat ment is designed to achieve effective
equality among Members. Therefore, the European Communities contends that the Panel's reasoning
undermines the principle of special and differe ntial treatment and challenges its "legitimacy". 44 The
European Communities also asserts that the Panel was "oblivious" 45 to certain elements of the
drafting history of the Enabling Clause, which indicate that the Contracting Parties intended to
strengthen the legal status of GSP schemes in the GATT by replacing the Waiver Decision on the
Generalized System of Preferences (the "1971 Waiver Decision")
46 with the Enabling Clause.
15. The European Communities further contends that special and differential treatment is critical
to achieving one of the fundamental objectives of the WTO Agreement, as identified in its Preamble:
ensuring that developing countries "secure a share in the growth in international trade commensurate
with the needs of their economic development". 47 Therefore, according to the European
Communities, the object and purpose of the Enabli ng Clause clearly distinguish it from exceptions
such as those found in Article XX(a) and (b) of the GATT 1994, which generally allow Members to
adopt "legitimate policy objectives" 48 that are separate and distinct from the objectives of the WTO
Agreement. In the European Communities' view, the Appellate Body decision in Brazil – Aircraft
confirms that the fact that a provision confers speci al and differential treatment is highly relevant in
determining whether that provision constitutes an exception.

41Ibid., para. 21.
42Ibid., para. 23.
43Ibid., para. 26. (original italics)
44Ibid.
45Ibid., para. 25.
46GATT Document L/3545, 25 June 1971, BISD 18S/24 (attached as Annex D-2 to the Panel Report).
47European Communities' appellant's submission, para. 20 (quoting WTO Agreement, Preamble, second
recital).
48Ibid., para. 52.

16. The European Communities notes the Panel's sugg estion that absurd results would flow from
characterizing the Enabling Clause as excluding the a pplication of Article I:1 because it "would mean
that GSP imports from different developing countries could be subject to different taxation levels in
the importing country's domestic market." 49 According to the European Communities, the Panel
confuses tariff measures covered by paragraph 2(a) with the imported products to which such
measures apply. Finding that the Enabling Clause excludes the application of Article I:1 would mean
only that Article I:1 does not apply to a tariff measure falling within paragraph 2(a) of the Enabling
Clause. It would not mean, as the Panel suggested, that Article I:1 does not apply with respect to
imported products covered by such a tariff measure.
17. The European Communities submits that, as a resu lt of the Panel's erroneous findings that the
Enabling Clause is an "exception" to Article I:1 and that the Enabling Clause does not prevent the
continued application of Article I:1, the Panel f ound that the European Co mmunities bears the burden
of justifying the Drug Arrangements under the En abling Clause. According to the European
Communities, the Enabling Clause imposes "positive obligations" 50 and is not an exception. As such,
it is India that must, in the first instance, claim that the Drug Arrangements are inconsistent with the
Enabling Clause and thereby bear the burden of dem onstrating that inconsiste ncy. According to the
European Communities, India made no claim un der the Enabling Clause. Consequently, the
European Communities requests the Appellate Body to reverse the Panel's finding that the Drug
Arrangements are inconsistent with Article I:1 of the GATT 1994 and to refrain from examining the
consistency of the Drug Arrangements with the Enabling Clause.
2. Whether the Drug Arrangements are Justified Under the Enabling Clause
18. The European Communities makes a "subsidia ry" appeal, which would arise only if
the Appellate Body were to find that the Enabli ng Clause is an exception to Article I:1 of the
GATT 1994, or that India made a valid claim under th e Enabling Clause. Specifically, the European
Communities claims "subsidiarily" 51 that the Panel erred in finding that the Drug Arrangements are
not "justified" 52 under paragraph 2(a) of the Enabling Clau se and, therefore, requests the Appellate
Body to reverse this finding.
19. According to the European Communities, th is finding of the Panel was based on two
erroneous legal interpretations. The first alleged error relates to the Panel's interpretation of the term

50Ibid., para. 39.
51Ibid., para. 67.
52Ibid. (quoting Panel Report, para. 7.177).

"non-discriminatory" in footnote 3 of the Enabling Clause as requiring GSP schemes to provide
"identical" preferences to "all" developing countri es without differentiation, except with regard to
a priori import limitations as permissible safeguard measures. The second error alleged by the
European Communities concerns the Panel's interpre tation of the term "developing countries" in
paragraph 2(a) of the Enabling Clause as meaning all developing countries, except with regard to
a priori limitations.
20. The European Communities asserts that the Panel's interpretation of the word "non-
discriminatory" in footnote 3 of the Enabling Cl ause is erroneous because the phrase "generalized,
non-reciprocal and non discriminatory" in footnote 3 merely refers to the description of the GSP in the
1971 Waiver Decision and, of itself, does not impose any legal obligation on preference-granting
countries.
53 Even assuming such obligations existed, th e European Communities maintains, the Panel
failed to take into account the context of foot note 3 and the object and purpose of the Enabling
Clause. Properly interpreted, the European Communities argues, the word "non-discriminatory"
allows a preference-granting country to accord diffe rential tariff treatment in its GSP scheme to
developing countries that have different development needs according to "objective criteria", provided
that tariff differentiation is an "adequate" response to these differences .54
21. The European Communities emphasizes that the immediate context for interpreting the term
"non-discriminatory" in footnote 3 includes the terms "generalized" and "non-reciprocal" in that same
footnote. These three terms express "distinct requirement[s]"
 55, according to the European
Communities, and they must be interpreted so that each is compatible with the other two, without
being rendered redundant.
22. According to the European Communities, the ordinary meaning of the word "generalized" and
the negotiating history indicate that GSP schemes are not required to cover all developing countries.
The word "generalized" in footnote 3 was intende d to distinguish these preferences from "special"
preferences, which were granted to selected de veloping countries for political, historical, or
geographical reasons. The European Communities main tains that consultations in the United Nations
Conference on Trade and Development ("UNCTAD") led to a compromise in the Agreed Conclusions
such that developed countries would, "in general" 56, recognize as beneficiaries those countries that

53European Communities' response to questioning at the oral hearing.
55Ibid., para. 80.
56Ibid., para. 87.

considered themselves as developing countries, although a developed country might decide to exclude
a country ab initio on grounds it considered "compelling".57
23. In contrast to the term "generalized", th e European Communities ar gues, the word "non-
discriminatory" relates to whethe r developed countries may grant different preferences to individual
developing countries that have already been reco gnized as beneficiaries of a GSP scheme. The
European Communities submits that the Panel's in terpretation of "non-discriminatory", as requiring
that identical preferences be granted to all developing countries, w ould render redundant the term
"generalized".
24. Referring to the term "non-reciprocal" in foot note 3, the European Communities argues that
reciprocity, in connection with inter-state relations, generally refers to an exchange of identical or
similar benefits. In contrast to the word "unc onditionally" found in Article I:1 of the GATT 1994, the
European Communities argues, the word "non-reciprocal" was not intended to prevent developed
countries from attaching all types of conditions to preferences granted under GSP schemes. Rather, in
the European Communities' view, the word "non-reciprocal" only prohibits developed countries from
imposing conditions of reciprocity. The European Communities contends that the Panel's
interpretation of "non-discriminatory" precludes the imposition of any conditions on the granting of
preferences, thereby rendering redundant the word "non -reciprocal" in footnote 3. In addition, the
European Communities claims, the Panel's interpretation equates conditional preferences with
discriminatory preferences. In fact, according to th e European Communities, a preference is not
rendered discriminatory by virtue of a condition being attached to it if the condition applies equally to,
and is capable of being fulfilled by, all GSP beneficiaries "that are in the same situation".58
25. The European Communities maintains that its interpretation of "non-discriminatory" in
footnote 3 does not render redundant paragraph 2(d) of the Enabling Clause, as the Panel suggested.
In the view of the European Communities, the scope of paragraph 2(a) differs from that of
paragraph 2(d) in three respects. First, paragraph 2(a) applies to preferences granted by developed
countries, whereas paragraph 2(d) includes preferences granted by any WTO Member. Secondly,
paragraph 2(a) relates only to preferences under GS P schemes, whereas paragraph 2(d) relates to any
measures imposed in favour of developing countries. Thirdly, paragraph 2(a) applies only to tariff
measures, whereas paragraph 2(d) applies to any kind of "special treatment". 59 In addressing only the

57European Communities' appellant's submission, paras. 85 and 87.
58Ibid., para. 120.
59Ibid., para. 122 (quoting Enabling Clause, para. 2(d) (attached as Annex 2 to this Report)).

last of these differences, the European Commun ities argues, the Panel's reasoning was "manifestly
flawed".
60
26. The European Communities points out that the Panel found that paragraph 3(c) of the
Enabling Clause allows developed countries to diffe rentiate in their GSP schemes in only two ways,
namely, in connection with least-developed countries and in the implementation of a priori
limitations. According to the European Communities, the Panel arrived at this interpretation despite
the absence of any such restriction in the text of paragraph 3(c) and despite the Panel's acceptance of
the European Communities' argument that the "n eeds" described in paragraph 3(c) extend to
individual or common needs of particular categories of developing countries. In fact, the European
Communities argues, paragraph 3(c) lends cont extual support to the European Communities'
interpretation of the word "non-discriminatory" in footnote 3. The European Communities claims that
the objective described in paragraph 3(c) is best achieved by allowing developed countries to design
their GSP schemes so as to take into account the development needs of certain categories of
developing countries.
27. The European Communities argues that the Panel' s contrary interpretation of paragraph 3(c)
stems from the Panel's concern that developed countries might abuse their discretion by distinguishing
arbitrarily between developing countries. In the view of the European Communities, such policy
concerns cannot replace the text of paragraph 3(c) . Furthermore, the European Communities submits
that this concern is unwarranted because the European Communities' interpretation of "non-
discriminatory" would not allow a preference-gran ting country to distinguish between developing
countries on the basis of political, historical, or geographical ties. Rather, a distinction would be
allowed only if it: (i) pursued an "objective which is legitimate in the light of the objectives of the
Enabling Clause" and the principle of special an d differential treatment; and (ii) represented a
"reasonable" and "proportionate" means of achieving that objective.
61 In order to assess whether these
criteria are met, panels need to analyze the relevant facts.
28. The European Communities contends that, because of the Panel's erroneous legal
interpretations, the Panel made insufficient fact ual findings in order for the Appellate Body to
complete the legal analysis regarding the consis tency of the Drug Arrangements with footnote 3.
Nevertheless, should the Appellate Body decide to complete this analysis, the European Communities
requests the Appellate Body to find that the Drug Arrangements are consistent with the term "non-
discriminatory" in footnote 3 and, therefore, with paragraph 2(a) of the Enabling Clause.

61Ibid., para. 135.

29. The European Communities contends that, although tariff preferences may not be an
"adequate" or "appropriate" respon se to other development problems, drug production and trafficking
form major economic activities in the relevant countries, which activities cannot be eliminated
without the provision of "alternative licit activities". 62 Therefore, the European Communities claims
that tariff preferences are an appropriate respon se to the drug problem, as recognized by the Members
of the WTO—through the Preamble to the Agreement on Agriculture and the waiver for the United
States' Andean Trade Preference Act 63—and the United Nations—through other instruments.
Furthermore, the European Communities argues th at the Drug Arrangements are non-discriminatory
because the drug problem affects individual developing countries in different ways, and because
beneficiaries under the Drug Arrangements are desi gnated according to the impact of the drug
problem in those countries.
30. The European Communities distinguishes the " object and purpose" of the Enabling Clause
from that of Article I:1 of the GATT 1994. Artic le I:1 focuses on providing equal conditions of
competition for imports of like products from WTO Members, whereas the Enabling Clause embodies
special and differential treatment for developing countries and, ther efore, aims to provide unequal
competitive opportunities to respond to the needs of such countries. The European Communities
claims that, in the light of the objectives associated with special and differential treatment, providing
additional preferences to countries with particular development needs is not discriminatory in the
context of the Enabling Clause. However, the Pane l failed to take into account these objectives. The
European Communities contends that the Panel should have interpreted the objectives described in the
Preamble to the WTO Agreement in a harmonious manner, instead of assuming that the objective of
eliminating discrimination prevails over the objectiv e of ensuring that developing countries secure a
share of international trade commensurate with their development needs.
31. The European Communities contends that the Panel relied selectively and incorrectly on
certain UNCTAD texts to support its findings. Acco rding to the European Communities, some of
these documents do not assist in interp reting footnote 3 of the Enabling Clause.
64 In several cases,
this is because they relate not to the issue of non-discrimination, but to the exclusion of certain

62European Communities' appellant's submission, paras. 144-145.
63Ibid., para. 148 (referring to Waiver Decision on the United States – Andean Trade Preference Act,
GATT Document L/6991, 19 March 1992, BISD 39S/385; renewed 14 October 1996, WT/L/184).
64Ibid., paras. 159-160 (referring to Resolution 21 (II) of the Second Session of UNCTAD, entitled
"Expansion and Diversification of Exports of Manufactures and Semi-Manufactures of Developing Countries"
(attached as Annex D-3 to the Panel Report) ("Resolution 21(II)")) and paras. 182-183 (referring to the
Recommendation contained in Annex A.II.1 to the Final Act and Report adopted at the First Session of
UNCTAD on 15 June 1964, at p. 26).

developing countries ab initio from GSP schemes.
65 The European Communities contends that
several other documents that the Panel relied on contain merely "expectations" 66 or "aim[s]" 67 of
particular parties, rather than agreed st atements of "legally binding" obligations. 68 Finally, the
European Communities argues, the Ag reed Conclusions do not purport to be an exhaustive regulation
of GSP schemes. Therefore, in the European Communities' view, the allowance under the Agreed
Conclusions for differentiation in favour of least-d eveloped countries does not mean that the Agreed
Conclusions prohibit all other forms of differentiation between developing countries.
32. The European Communities submits that the practice by developed countries of seeking
waivers in order to provide more favourable treat ment to a limited number of developing countries—
as highlighted by the Panel—does not mean that such treatment may not otherwise be provided.
According to the European Communities, the waiv ers mentioned by the Panel all relate to the
restriction of preferences ab initio to particular countries in a particular region. The European
Communities further points out that, in seeking these waivers, the preference-granting countries did
not claim that the preferences were restricted to developing countries with development needs of a
specific kind.
33. The European Communities contends that the Pa nel's interpretation of the term "developing
countries" in paragraph 2(a) of the Enabling Clau se is erroneous because it is entirely dependent on
the Panel's erroneous interpretation of the word "n on-discriminatory". In the European Communities'
view, as the word "non-discriminatory" in footnote 3 of the Enabling Clause allows Members to
differentiate between developing countries with diffe rent development needs, it follows for the same
reasons that paragraph 2(a) does not require Members to grant the same preferences to all
developing countries.
34. For these reasons, the European Communities re quests the Appellate Body to reverse the
Panel's finding that the Drug Arrangements are inc onsistent with paragraph 2(a) of the Enabling
Clause and, in particular, with footnote 3 thereof.

65European Communities' appellant's submission, paras. 162-163 (referring to the Charter of Algiers,
TD/38, adopted at the Ministerial Meeting of the Group of 77 on 24 October 1967 ("Charter of Algiers")) and
paras. 179-181 (referring to General Principle Eight contained in the Final Act and Report adopted at the First
Session of UNCTAD on 15 June 1964, at p. 20 (Exhibit EC-20 submitted by the European Communities to the
Panel) ("General Principle Eight")).
66Ibid., para. 162 (referring to Charter of Algiers).
67Ibid., para. 165 (referring to the Report of the Special Group of the Organization for Economic Co-
operation and Development (OECD) on Trade with Developing Countries, TD/56, 29 January 1968 ("OECD
Special Report")).
68Ibid., para. 180 (referring to General Principle Eight).

B. Arguments of India – Appellee
1. The Relationship Between Article I:1 of the GATT 1994 and the Enabling
Clause
35. India argues that the Panel correctly found that the Enabling Clause is an "exception" to
Article I:1 of the GATT 1994 and requests the Appella te Body to uphold this finding. In addition,
India submits that it made a claim against the Drug Arrangements under the Enabling Clause and that,
therefore, the Appellate Body should examine th e consistency of the Drug Arrangements under the
Enabling Clause, even if it finds that the Enabling Clause is not an exception to Article I:1.
36. India contends that the Panel's test as to what is an "exception" is consistent with previous
Appellate Body decisions. According to India, the Appellate Body drew an important distinction in
US – Wool Shirts and Blouses between "positive rules establishing obligations in themselves" and
"exceptions" to those obligations. 69 India states that an exception is an "affirmative defence" 70 and,
accordingly, panels examine the consistency of a challenged measure with an exception only if the
Member complained against invokes the exception to justify its measure. This leaves the Member
with the choice of which exceptions to invoke and pr events exceptions being tu rned into rules. In
other words, in India's view, a Member needs to comply with a provision that is an exception only
when the Member invokes that exception to justify an inconsistency with another provision.
37. Applying this reasoning to the present dispute, India characterizes paragraph 2(a) of the
Enabling Clause as an "exception" to Article I:1, because it grants developed-country Members a
"conditional right" 71 to provide tariff preferences to developing-country Members under the
conditions contained in pa ragraphs 2(a) and 3 of the Enabling Clause. India submits that these
paragraphs impose conditions only on Members w ho invoke the Enabling Clause as a defence,
whereas Article I:1 imposes obligations regardless of the defence invoked.
38. India argues, with reference to the Vienna Convention, that "subsequent practice" 72 supports
its interpretation. First, India maintains that a ll waivers for preferential ta riff treatment for products
from developing countries have permitted derogations from Article I without mentioning the Enabling

69India's appellee's submission, para. 36 (quoting Appellate Body Report, US – Wool Shirts and
Blouses, p. 16, DSR 1997:I, at 337).
70Ibid., para. 36.
71Ibid., para. 39.
72Ibid., para. 42 (referring to Vienna Convention, Art. 31.3(b)).

Clause. Indeed, according to India, the fact that the European Communities requested a waiver
 73
from its obligations under Article I:1 in respect of the Drug Arrangeme nts cannot be reconciled with
the European Communities' position that the Enabling Clause excludes the application of Article I:1.
Secondly, India refers to two GATT panels that examined, first, the consistency of a challenged
measure under Article I:1, before proceeding to c onsider whether the measure was authorized under
the Enabling Clause. India regards this as evidence of the "common understanding" of the
Contracting Parties to the General Agreement on Tariffs and Trade 1947 (the "GATT 1947")
regarding the relationship between Article I:1 and the Enabling Clause.74
39. India disputes the European Communities' c ontention that the Enabling Clause is not an
exception to Article I:1 because the Enabling Clause constitutes lex specialis . India argues, with
reference to a study by the International La w Commission and certain Appellate Body decisions 75,
that the "maxim lex specialis derogat legi generali " 76 means not that a special rule necessarily
excludes the application of a related general rule, but that the two rules apply cumulatively, and the
special rule prevails over the general rule only to the extent of any conflict between the two rules.
Thus, India maintains, developing-country Members have not waived their rights under Article I:1,
which applies "cumulatively" with the Enabling Clau se, except to the extent that these provisions are
in conflict with each other. 77
40. India also contests the European Communities' reliance on the Appellate Body decisions in
Brazil – Aircraft and EC – Hormones. India states that these appeals related to Article 27.2(a) of the
SCM Agreement and Article 3.1 of the SPS Agreement, both of which provisions explicitly exclude
other provisions. India argues that, in contrast , the Enabling Clause does not clearly exclude the
application of Article I:1 of the GATT 1994. In India's view, this supports India's contention that
Article I:1 and the Enabling Clause apply "concurrently".78

73Council for Trade in Goods, Request for a WTO Waiver, "New EC Special Tariff Arrangements to
Combat Drug Production and Trafficking", G/C/W/328, 24 October 2001 (Exhibit India-2(b) submitted by India
to the Panel).
74India's appellee's submission, para. 43 (referring to GATT Panel Report, US – Customs User Fee ,
1988, BISD 35S/245, at 289-290; and GATT Panel Report, US – MFN Footwear , 1992, BISD 39S/128,
at 153).
75Ibid., paras. 76-80 (referring to International Law Commission, Study Group on Fragmentation:
Koskenniemi, p. 5, <http://www.un.org/law/ilc/sessions/55/fragmentation_outline.pdf>; Appellate Body Report,
Argentina – Footwear (EC), para. 89; and Appellate Body Report, Guatemala – Cement I, para. 65).
76Ibid., para. 76.
77Ibid., heading II.C.1.
78Ibid., para. 51.

41. India claims that, even if the Appellate Body were to find that the Enabling Clause is not an
exception to Article I:1, the Appellate Body s hould assess the consistency of the Drug Arrangements
with the Enabling Clause because India did make a claim under the Enabling Clause. The European
Communities' argument to the contrary, acco rding to India, is "factually baseless". 79 India highlights
that it originally requested the establishment of a panel "to examine whether [the Drug Arrangements]
are consistent with Article I:1 … and ... the Enabling Clause".80 In addition, India maintains that, in
its first and second written submissions to the Pane l, it requested the Panel to find that the Drug
Arrangements " are not justified [by] the Enabling Clause ".81 Moreover, India states that the
European Communities acknowledged in its first wr itten submission to the Panel that the Enabling
Clause forms part of India's claim 82, and that the Panel confirmed India's inclusion of this claim in
paragraph 7.61 of the Panel Report.
42. India submits that it does not follow from India's characterization of the Enabling Clause as
an "exception"—which was a "procedural argumen t" regarding the allocation of the burden of
proof—that India made no "substantive" claims under the Enabling Clause. 83 India maintains that, in
response to questioning by the Panel, it "merel y stated that the Enabling Clause is not a material
element of India’s claim under Article I:1 of the GATT ." 84 Furthermore, India reiterated its request
for the Panel to examine the consistency of the Drug Arrangements with the Enabling Clause at the
second substantive meeting of the Panel and at the inte rim review stage. In addition, India maintains
that the Panel would have had "competence" 85 to assess the Drug Arrangements under the Enabling
Clause even if the Panel had found that the Enab ling Clause is not an exception to Article I:1. 86 In
India's view, requiring India to resubmit its claims under the Enabling Clause to a new panel would be
contrary to the "fundamental principle of good faith" 87 and the objectives of the dispute settlement

80Ibid., para. 54 (quoting request for the establishmen t of a panel by India, WT/DS246/4, 9 December
2002, p. 2). (italics added by India in its appellee's submission)
81Ibid., para. 56 (quoting Indi a's first written submission to the Pa nel, para. 67; and India's second
written submission to the Panel, para. 164). (italics added by India in its appellee's submission)
82Ibid., para. 58 (referring to European Communities' fi rst written submission to the Panel, paras. 57,
141, and 206).
83Ibid., para. 70.
84Ibid., para. 64. (original italics)
85Ibid., heading II.B.3.
86Ibid., paras. 70-71 (referring to Panel Report, US – Wool Shirts and Blouses; Appellate Body Report,
EC – Hormones, footnote 71 to para. 109 and footnote 180 to para. 197; and DSU, Arts. 7.2 and 11).

system.
88 India asserts that the question of which party bears the burden of proof "does not affect the
outcome of this dispute".89
43. Finally, India emphasizes that the European Communities has not yet obtained a waiver from
its obligations under Article I:1 with respect to the Drug Arrangements and that only the WTO
Members can provide such a waiver.
44. For these reasons, India requests the Appellate Body to uphold the Panel's finding that the
Enabling Clause is an exception to Article I:1 of the GATT 1994.
2. Whether the Drug Arrangements are Justified Under the Enabling Clause
45. India requests the Appellate Body to uphold the Panel's finding that the Drug Arrangements
are not justified under the Enabling Clause. In partic ular, India maintains that paragraph 2(a) of the
Enabling Clause does not authorize the European Communities to differentiate between developing-
country Members that are beneficiaries under the European Communities' GSP scheme.
46. At the outset, India submits that the pr esent dispute focuses not on the European
Communities' initial selection of particular deve loping countries as beneficiaries under its GSP
scheme, but on the European Communities' treatment of developing countries already identified as
beneficiaries under that scheme. Therefore, according to India, the Appellate Body is not required to
examine legal issues arising from the initial selecti on of beneficiaries under the Enabling Clause.
Rather, India urges the Appellate Body to find that the term "developing countries" in footnote 3 of
the Enabling Clause includes at least those countries that are beneficiaries under a given GSP scheme,
and that the words "products originating in devel oping countries" in paragra ph 2(a) refer to products
originating in any of those beneficiary countries.
47. India argues that its interpretation is reinforced by the nature of the MFN principle embodied
in Article I:1 as "a fundamental norm of the rules-based multilateral trading system of the WTO". 90
India points to Appellate Body decisions as support for its view that "derogations" from Article I:1
exist only where provided for explicitly. 91 India emphasizes that paragraph 2(a) of the Enabling
Clause does not specifically state that developing countries waive their rights to MFN treatment.
Moreover, the object and purpose of the Enabling Clause, as well as its drafting history, indicate that

88India's appellee's submission, para. 74 (referring to DSU, Arts. 3.3-3.4 and 3.7).
89Ibid., para. 73.
90Ibid., para. 1.
91Ibid., paras. 93-94 (referring to Appellate Body Report, Canada – Autos , para. 84; and Appellate
Body Report, EC – Bananas III, paras. 190-191).

the developing countries did not agree to reli nquish their MFN rights as between themselves in
agreeing to paragraph 2(a) of the Enabling Clause.
48. India contends that the Drug Arrangements are not "non discriminatory preferences beneficial
to the developing countries" within the meaning of footnote 3 of the Enabling Clause. First, India
relies on dictionary definitions to ascertain that the ordinary meaning of "non-discriminatory
preferences" in footnote 3 is "preferentia l tariff treatment that is applied equally". 92 Secondly, India
finds "contextual guidance" 93 on the meaning of "non-discriminatory" in Articles I, XIII, and XVII of
the GATT 1994. According to India, these provisions confirm that "non-discrimination" refers to the
provision of "equal competitive opportunities" in relation to non-tariff measures and of "formally
equal[] treatment" in relation to tariff measures. 94 In addition, in India's submission, the inclusion of
the word "unjustifiable" before the word "discrim ination" in the chapeau of Article XX of the
GATT 1994 demonstrates that a Member's reasons fo r distinguishing between products of different
origin are not relevant to whether such distinction constitutes discrimination.
49. Turning to the words "generalized" and "non-reci procal" in footnote 3, India argues that the
word "generalized" refers to the countries that should be included ab initio as beneficiaries under a
GSP scheme, whereas the word "non-discriminatory" refers to the treatment of products originating in
beneficiary countries. Even if "generalized" meant that all developing countries must be included
ab initio as beneficiaries, in India's view, the "additional requirement"
 95 imposed by the word "non-
discriminatory" would still be relevant in a ddressing the separate question of how products from
beneficiary countries should be treated. India cont ests the European Communities' argument that the
Panel's interpretation of "non-discriminatory" re nders redundant the word "non-reciprocal" in
footnote 3. India suggests that reciprocity is a "principle of trade negotiations" 96, whereas "non-
discriminatory" addresses the implementation of the results of such negotiations. India argues that
Part IV of the GATT 1994 (entitled "Trade and De velopment") was added to the original GATT
provisions because it is possible to comply with the principle of non-discrimination while insisting on
non-reciprocity in negotiations.

93Ibid., para. 115.
94Ibid., paras. 118 and 120 (referring to Appellate Body Report, EC – Bananas III , paras. 190-191).
(See also, ibid., paras. 170 and 180)
95Ibid., para. 148.
96Ibid., para. 153.

50. India contends that paragraph 2(a) of the Enabling Clause and Article I:1 of the GATT 1994
must be interpreted in a harmonious manner so as to give effect to both provisions.
97 With this in
mind, India submits that the Enabling Clause should be interpreted to authorize only those deviations
from the MFN principle that are necessary in orde r for GSP schemes to operate. Thus, the Enabling
Clause authorizes developed-country Members to ex clude other developed countries from their GSP
schemes, because Members could not grant any tariff preferences under these schemes if such
exclusion was not authorized. However, in India' s view, the Enabling Clause does not authorize tariff
preferences that differentiate between developi ng countries, as tariff preferences under GSP schemes
can be and are granted to developing countries wit hout differentiation of this kind. According to
India, a contrary interpretation would be inconsiste nt with the need to interpret paragraph 2(a) and
Article I:1 so as to avoid conflict between the two provisions.
51. India derives support for its interpretation from several provisions of the Enabling Clause. In
particular, India reads paragraphs 2(a) and 2(d) t ogether as identifying three categories of countries:
the developed countries, the developing countries, a nd the least-developed countries. In India's view,
under the Enabling Clause, the developed countries "relinquished" their MFN rights in respect of
preferential tariff treatment in favour of deve loping and least-developed countries, whereas the
developing countries "relinquished" their MFN rights only in respect of preferential treatment in
favour of least-developed countries.
98 However, India sees nothing in the text of the Enabling Clause
to indicate that developing countries have simila rly relinquished their MFN rights in relation to
preferential treatment accorded by developed countries to othe r developing countries. India suggests
that the European Communities itself recogni zed this fact prior to this dispute. 99 India maintains that
paragraph 2(d) was specifically inserted to allow differentiation of a kind that was not previously
allowed under the 1971 Waiver Decision. India argues that the European Communities' current
interpretation of "non-discriminatory" in footnote 3 would render paragraph 2(d) redundant, contrary
to the "principle of effectiveness in treaty interpretation".100
52. The opening words of paragraph 3(c) demonstrat e, according to India, that paragraph 3(c)
of the Enabling Clause does not provide for derogations from obligations imposed under
paragraph 2(a), (b), or (d). Further, unlike para graphs 5 and 6, paragra ph 3(c) does not refer to

97India's appellee's submission, para. 83 (referring to Appellate Body Report, Korea – Dairy, para. 81;
Appellate Body Report, Argentina – Footwear (EC) , para. 81; and International Court of Justice, Preliminary
Objections, Right of Passage over Indian Territory (Portugal v. India), 1957, ICJ Reports, p. 142).
98Ibid., paras. 3 and 5.
99Ibid., para. 6 (referring to "User's Guide to the European Union's Scheme of Generalised Tariff
Preferences" (February 2003) (Exhibit India-1 submitted by India to the Panel)).
100Ibid., para. 132 (referring to Appellate Body Report, US – Gasoline, p. 23, DSR 1996:I, at 21).

"individual" or "particular" needs of developing co untries. India argues that this shows that the
"needs" intended by the drafters under paragraph 3(c) are the needs of "developing countries as a
whole".101
53. India draws support for its reading of para graph 2(a) from the object and purpose of
the Enabling Clause. According to India, the purpose includes: facilitating "mutually acceptable
arrangements" 102 that were "unanimous[ly] agree[d]" 103 in UNCTAD; replacing "special
preferences" 104 granted only to some developing countri es with generalized preferences that do not
differentiate between developing countries; and, pr omoting the trade of developing countries without
raising barriers to or creating undue difficulties fo r the trade of other Members, as confirmed in
paragraph 3(a). India points to several UNCTAD texts to confirm these purposes 105, arguing that the
European Communities offers no such support for its contrary views. India regards differentiation
between developing countries under a GSP scheme as inconsistent w ith paragraph 3(a) because it
creates difficulties for the trade of other developing countries by "divert[ing] competitive
opportunities"
 106 from one country to another. In addition, India contends that linking GSP benefits
to "the situation or policies" 107 of beneficiaries reduces the certainty and value of such benefits.
54. India contends that the Europ ean Communities' interpretation of paragraph 3(c) would mean
that developed countries "would have the obligation" 108 to differentiate between developing
countries according to their individual needs. This would have the "absurd consequence" 109 that a
measure eliminating tariffs on products from all least-developed countries, without differentiating
between those countries would be open to challe nge under paragraph 3(c). Moreover, India argues
that it would result not only in the European Co mmunities' scheme, but in all GSP schemes being
inconsistent with the Enabling Cl ause because they do not differentia te between developing countries
based on their individual development needs. India also main tains that the European Communities'
suggestion that its interpretation would best fulfil th e objectives of paragraph 3(c) is inconsistent with

102Ibid., paras. 95 and 190.
103Ibid., para. 165.
104Ibid., paras. 147 and 190.
105Ibid., paras. 158-184 (referring to Agreed Conclusions; Resolution 21(II); Resolution 24(II) of the
Second Session of UNCTAD; Charter of Algiers, paras. (a) and (d); and OECD Special Report, part II).
106Ibid., para. 192.
107Ibid., para. 21.
108Ibid., para. 14. (original italics)
109Ibid., para. 15.

the rule that treaty interpretation should be based on the text and not on policy considerations that are
not reflected in the text.
55. For these reasons, India requests the Appellate Body to uphold the Panel's finding that the
Drug Arrangements are not justified under the Enabling Clause.
C. Arguments of the Third Participants
1. Andean Community

56. The governments of Bolivia, Colombia, Ecuador, Peru, and Venezuela (jointly, the "Andean
Community") submit that the Panel erred in finding that the Enabling Clause is an "exception" to
Article I:1 of the GATT 1994 and in finding that Artic le I:1 applies concurrently with the Enabling
Clause. The Andean Community also contends th at, contrary to the Panel's finding, the Drug
Arrangements are consistent with the Enabling Clause. Accordingly, the Andean Community
supports the European Communities' contention that the Drug Arrangements are "fully WTO-
compatible".110
57. The Andean Community argues that the En abling Clause establishes "a self-standing
regime" 111, meaning that Article I:1 of the GATT 1994 does not apply to GSP schemes. 112 According
to the Andean Community, the ordinary meaning of the word "notwithstanding" in paragraph 1 of the
Enabling Clause confirms this interpretation, as do the context, and object and purpose of the
Enabling Clause. In addition, the "history, ... practice and ... current role" 113 of the Enabling Clause
indicate that GSP schemes provide the "most concrete and relevant form" 114 of special and differential
treatment. This supports the concept of the Enab ling Clause as a self-standing regime. According to
the Andean Community, because measures falling within the Enabling Clause are to be judged solely
under the Enabling Clause, India was required to ma ke a claim under the Enabling Clause. As India
did not do so, the Andean Community maintains, India's claim should be dismissed.
58. The Andean Community submits further that, even if the Enabling Clau se is an exception to
Article I:1, this characterization is not determinativ e of which party bears the burden of proof. The
Andean Community asserts that the Panel erred in assigning the burden. According to the Andean

110Andean Community's third participant's submission, para. 97.
111See, for example, ibid., paras. 8, 12, and 27.
113Ibid., para. 13.
114Ibid., para. 21.

Community, under the Panel's allocation of the burde n of proof, every GSP scheme would be open to
challenge, with the burden falling on each preference- granting country to establish the consistency of
its GSP scheme with the Enabling Clause. The A ndean Community claims that the assigning of the
burden of proof is "a fundamental initial decision upon which every further c onsideration is based",
such that the Appellate Body "should reverse on this element alone".115
59. Regarding the consistency of the Drug Arrange ments with the Enabling Clause, the Andean
Community submits, first, that the Panel did not pr operly interpret the historical texts serving as
context and preparatory work for the Enabling Clause. The Andean Community emphasizes the
"aspirational tone" 116 of these texts and argues that the Panel "mischaracterize [d]" 117 certain texts as
binding or reflecting "unanimous agreement". 118 Secondly, turning to the interpretation of the term
"non-discriminatory" in the Enabling Clause, the Andean Community contends that the Panel wrongly
equated this concept with MFN treatment. The An dean Community further alleges that the Panel's
allowance for a priori limitations under the Enabling Clause is contrary to the Panel's own
interpretation of "non-discriminatory".
60. In the view of the Andean Community, "a prohibition of discrimination is a command not to
treat equal situations differently, or different situations equally" 119 and, accordingly, the word "non-
discriminatory" in the Enabling Clause does not requi re that identical treatment be granted to all
developing countries. The Andean Community suggests that differentiating between developing
countries—taking into account their objectively different situations—does not constitute
discrimination. The Andean Community argues that the "production and trafficking of illicit drugs
have far-reaching, unparalleled a nd unquantifiable implications for the economic and social
development" 120 of affected developing countries. By providing preferential access for "alternative
products" 121 and, thereby, seeking to reduce the impor tance of drugs as an economic activity, the
European Communities responds to these countries' specific needs. The Andean Community asserts
that this response is consistent with the requirements of the Enabling Clause.

115Andean Community's third participant's submission, para. 41.
116Ibid., para. 50.
117Ibid., para. 56. (original underlining)
118Ibid., para. 55.
119Ibid., para. 64.
120Ibid., para. 78.
121Ibid., para. 87.

2. Costa Rica

61. Costa Rica submits that the Panel erred in finding that the Drug Arrangements are not
justified under the Enabling Clause. Costa Rica asser ts that the Panel based this finding on erroneous
interpretations of the terms "non-discriminatory" and "developing countries" contained in footnote 3
and paragraph 2(a), respectively, of the Enabli ng Clause. Accordingly, Costa Rica supports the
European Communities' request that the Appellate Body reverse this finding.
62. Costa Rica contends that, instead of relying on the ordinary meaning of these terms of the
Enabling Clause in context, the Panel relied on other instruments that "cannot be properly considered
context for the interpretation of the Enabling Clause". 122 Costa Rica maintains that this led to the
Panel's incorrect finding that "non-discriminatory" treatment under footnote 3 of the Enabling Clause
is synonymous with identical or unconditional tr eatment. Costa Rica asserts that had the Panel
interpreted the Enabling Clause in accordance with Article 31 of the Vienna Convention—in the light
of the object and purpose of the Enabling Clause and the 1971 Waiver Decision—it would have found
that "the 'non-discriminatory' standard prohibits developed countries from according tariff preferences
that make an unjust or prejudicial distinction between different categories of developing countries." 123
63. In addition, according to Costa Rica, the Panel erred in concluding that the term "developing
countries" in paragraph 2(a) of the Enabling Class means all developing countries. In Costa Rica's
view, in interpreting this term, the Panel relied on its incorrect interpretation of the term "non-
discriminatory " and failed to examine paragraph 1 of the Enabling Clause as relevant context.
Moreover, Costa Rica is of the opinion that it is not appropriate to consider the travaux
préparatoires as a supplementary means of inte rpretation under Article 32 of the Vienna Convention
in interpreting paragraph 2(a). However, even if this were appropriate, the drafting history of the
1971 Waiver Decision confirms that the term "devel oping countries" means less than all developing
countries.
3. Panama
64. Panama submits that the Panel erred in finding that the Enabling Clause is an "exception" to
Article I:1 of the GATT 1994. Panama maintains that the Enabling Clause is " per se an autonomous
rule" 124 that permits the granting of more favourable treatment to developing countries. Panama also
contests the Panel's finding that the Drug Arrangeme nts are incompatible with the Enabling Clause.

122Costa Rica's third participant's submission, para. 6.
123Ibid., para. 15.
124Panama's third participant's submission, para. 4.

In particular, Panama argues that the Panel erred in interpreting the term "non-discriminatory" in
footnote 3 of the Enabling Clause as requiring pr eference-granting countr ies to accord identical
treatment to all developing countries. Panama therefore states that it is "completely in agreement with
the arguments by the European Communities".125
65. Panama is of the view that, if the Enabling Clause were an exception to Article I of the
GATT 1994, it would be included as a waiver decision in the GATT 1994. 126 Because the Enabling
Clause is not so included, Panama contends, it is an "independent" and "special" rule governing the
differential and more favourable treatment accorded to developing countries under the schemes set out
in paragraph 2 of the Enabling Clause. 127 Panama submits that "the Enabling Clause creates a
standalone mechanism that is linked to the general principle contained in GATT Article I:1" 128 and, as
such, constitutes an "autonomous right" 129 of WTO Members.
66. Panama argues that the Enabling Clause is not an affirmative defence but, rather, "excludes
the application of ... Article I:1".130 As such, Panama claims, it was up to India to claim that the Drug
Arrangements do not fall within the scope of pa ragraph 2(a) of the Enabling Clause and are
inconsistent with paragraph 3(c) thereof. Becau se India did not do so, Panama argues, the Appellate
Body should refrain from assessing the consistenc y of the Drug Arrangements with the Enabling
Clause.
67. According to Panama, "non-discrimination" does not mean equal treatment. Panama submits
that the fact that the Drug Arrangements are not extended to all developing countries does not mean
that they discriminate between developing countr ies. In addition, Panama maintains that the
obligation imposed in paragraph 3(c) of the Enabli ng Clause must be interpreted in order to allow
some flexibility for preference-granting countries to provide preferential treatment that "effectively
help[s] 'genera lized' needs". 131 In this respect, Panama claims, the Drug Arrangements satisfy the
"requirement" in paragraph 3(c) because they respond to "specific growth needs".132

125Panama's third participant's submission, para. 1.
126Paragraph 1(b)(iii) of the language of Anne x 1A incorporating the GATT 1994 into the WTO
Agreement.
127Panama's third participant's submission, paras. 5-6.
128Ibid., para. 10.
129Ibid., para. 8.
130Ibid., para. 17.
131Ibid., para. 23.
132Ibid., para. 13.

4. Paraguay

68. Paraguay contends that the Panel was correct in finding that the Enabling Clause is an
"exception" to Article I:1 of the GATT 1994. In addition, Paraguay agrees with the Panel's
interpretation of paragraph 2(a) of the Enabling Clause and the Panel's consequent finding that the
Drug Arrangements are not justified by the Enabling Clause. Accordingly, Paraguay supports India's
request that the Appellate Body uphold these findings.
69. According to Paraguay, where a Member's measu re differentiates between other Members in
a manner inconsistent with Article I:1 and does not fall within any specific exceptions such as the
Enabling Clause or Article XX of the GATT 1994, th e only way for that Member to impose its
measure in accordance with its WTO obligations is to seek a waiver under Article IX of the
WTO Agreement . Paraguay maintains that the Drug Arrange ments are inconsistent with Article I:1
and that the European Communities has received no such waiver in respect of them.
70. Paraguay contests the European Communities' characterizati on of the Enabling Clause as a
"different, parallel legal regime".
133 Paraguay maintains that Article I:1 forms the "primary basis" for
WTO trade and that exceptions to Article I:1 must be founded on "properly established legal rules".134
In Paraguay's view, the Enabling Clause is an exception to Article I:1 and is a part of the GATT 1994,
and the GSP recognized in the Enabling Clause is "a permanent mechanism of the rules-based
multilateral trading system".135
71. Paraguay emphasizes that developing countries did not renounce their right to MFN treatment
under Article I:1 of the GATT 1994 in agreeing to the Enabling Clause. According to Paraguay, the
Enabling Clause was adopted to re place the "special preferences"
 136 provided by developed countries
to certain developing countries, with a genera lized system under which all developing countries
would benefit. Paraguay argues that the only distin ction that the WTO draws within the category of
developing countries is in recognizing the category of least-developed countries, as explicitly stated in
paragraph 2(d) of the Enabling Clause. As such, in Paraguay's view, the "condition"
 137 of non-
discrimination in footnote 3 means that benefits granted to some developing countries must be granted

133Paraguay's third participant's submission, para. 13.
134Ibid., para. 12.
135Ibid., para. 11.
136Ibid., para. 14.
137Ibid., para. 27.

to all such countries. Therefore, Paraguay submits that tariff preferences pursuant to the Enabling
Clause must apply to all developing countries.
5. United States
72. The United States contends that the Panel misconceived the relationship between the
Enabling Clause and Article I:1 of the GATT 1994. The United States also submits that the Panel
erred in concluding that the term "non-discriminat ory" in footnote 3 of the Enabling Clause requires
preference-granting countries to accord "identic al" treatment to all beneficiaries and that,
consequently, paragraph 2(a) covers only identical preferences extended to all developing countries.
Accordingly, the United States supports the European Communities' request that the Appellate Body
reverse the Panel's legal interpretation of th e terms "non-discriminatory" in footnote 3 and
"developing countries" in paragraph 2(a) and, co nsequently, reverse the Panel's finding that the
Enabling Clause is an "exception" to Article I:1.
73. Beginning with the relationship between Artic le I:1 and the Enabling Clause, the United
States claims that the Panel failed to consider th e entire text of the Enabling Clause and the context
and object and purpose of the Enabling Clause and of the GATT 1994. The United States argues that
the Panel "misconstru[ed]" the statement of the Appellate Body in US – Wool Shirts and Blouses and
applied this statement "as a mechanical 'test' " without due regard to the te rm "notwithstanding" in the
Enabling Clause. 138 The United States observes that the Pa nel examined the ordinary meaning of
"notwithstanding" in paragraph 1 of the Enabling Clause only after the Panel had concluded that the
Enabling Clause is an "exception". In addition, in the view of the United States, the reasoning
underlying the Panel's conclusion that the Enabling Clause is an exception "would result in ...
inconsistencies and absurd results" 139 because several WTO obligations apply only if a Member
chooses to take the action addressed in the relevant provision.
74. The United States submits that the Enabling Clause is part of the overall balance of rights and
obligations in the covered agreements and, as such, is a "separate provision authorizing the types of
treatment provided therein", "in spite of" the MFN obligation in Article I:1. 140 In other words, the
United States maintains that, contrary to th e finding of the Panel, the Enabling Clause is a "positive
rule establishing obligations in itself". 141 The United States emphasizes that several aspects of the
Enabling Clause are unrelated to Article I:1 and th at the Enabling Clause is incorporated into the

138United States' third participant's submission, paras. 2-3.
139Ibid., para. 5.
140Ibid., paras. 3 and 10.
141Ibid., para. 4.

GATT 1994. The United States also argues that, unl ike Article XX of the GATT 1994, the Enabling
Clause " encourages"
 142 developed-country Members to grant preferences to developing-country
Members. In the view of the United States, "[ p]lacing the burden on developed countries to defend
actions they take to benefit devel oping countries ... would create a disincentive for developed
countries" to take such action.143
75. Turning to footnote 3 of the Enabling Clau se, the United States contests the Panel's
"assum[ption]" 144 that the term "non-discriminatory" in footnote 3 imposes obligations on preference-
granting countries. In the view of the United Stat es, "[t]his footnote is simply a cross-reference to
where the Generalized System of Preferences is described." 145 Because the Panel began its analysis
"from a false premise", the United States suggests that the Panel's finding as to footnote 3 "should be
rejected on that basis alone".
146 In any case, the United States contends, the Panel erroneously arrived
at a "one size fits all" 147 obligation to grant "identical" tariff preferences to "all" developing countries.
Furthermore, according to the United States, the f act that the Panel understood the Enabling Clause to
allow a priori limitations demonstrates that the term “non-discriminatory” does not preclude all
conditions. The United States asserts that the Panel focused not on the text, but on a policy concern—
the prevention of "abuse" 148 by preference-granting countries. In the United States' view, the Panel's
focus on this policy concern is inconsistent with Article 3.2 of the DSU and led to an incorrect
interpretation of "non-discriminatory".
76. With respect to paragraph 3(c) of the Enabli ng Clause, the United States argues that the Panel
wrongly interpreted this provision as imposing an obligation not to provide differentiated GSP
benefits. In doing so, the United States submits , the Panel failed to recognize that the term
"generalized" in footnote 3 ensures that the responses of preference-granting countries to the needs of
developing countries do not result in tariff advantages accorded primarily to select countries.
77. Finally, the United States contends that the Pa nel's interpretation of "developing countries" in
paragraph 2(a) as referring to all developing countries is "completely dependent" 149 on its erroneous
interpretation of "non-discriminatory". Moreover, the United States argues, the Enabling Clause

142United States' third participant's submission, para. 8. (original italics)
143Ibid., para. 9. (original italics)
144Ibid., para. 11.
145Ibid.
146Ibid.
147Ibid., para. 22.
149Ibid., para. 23.

refers only to "developing countries" or "the developing countries", and not to " all developing
countries".150
III. Issues Raised in This Appeal
78. The following issues are raised in this appeal:
(a) Whether the Panel erred in concluding th at the "special arrangements to combat
drug production and trafficking" (the "Dr ug Arrangements"), which are part of
Council Regulation (EC) No. 2501/2001 (the "Regulation") 151, are inconsistent with
Article I:1 of the General Agreement on Tariffs and Trade 1994 (the
"GATT 1994")152, based on the Panel's findings that:
(i) the Decision on Differential and More Favourable Treatment, Reciprocity, and
Fuller Participation of Developing Countries (the "Enabling Clause") 153 is an
"exception" 154 to Article I:1 of the GATT 1994;
(ii) the Enabling Clause "does not exclude the applicability" 155 of Article I:1 of
the GATT 1994; and
(iii) the European Communities bears the bur den of invoking the Enabling Clause
and proving that the Drug Arrangements are consistent with that Clause 156;
and
(b) Whether the Panel erred in concluding th at the European Communities failed to prove
that the Drug Arrangements are justified under paragraph 2(a) of the Enabling
Clause
 157, based on the Panel's findings that:

150United States' third participant's submission, para. 24. (original italics)
151Council Regulation (EC) No. 2501/2001 of 10 D ecember 2001 applying a scheme of generalised
tariff preferences for the period from 1 January 2002 to 31 December 2004, Official Journal of the European
Communities, L Series, No. 346 (31 December 2001), p. 1 (Exhibit India-6 submitted by India to the Panel).
152Panel Report, paras. 7.60 and 8.1(b).
153GATT Document L/4903, 28 November 1979, BISD 26S/203 (attached as Annex 2 to this Report).
154Panel Report, para. 7.53.
155Ibid.
156Ibid.
157Ibid., para. 8.1(d).

(i) the term "non-discriminatory" in footnote 3 to paragraph 2(a) of the
Enabling Clause requires that, pursuant to schemes under the Generalized
System of Preferences ("GSP"), "identical tariff preferences"
 158 be provided to
all developing countries without differentiation, except as regards the
implementation of a priori limitations; and
(ii) the term "developing countries" in paragraph 2(a) of the Enabling Clause
means "all"
 159 developing countries, except as regards the implementation of
a priori limitations.
IV. The Relationship Between Article I:1 of the GATT 1994 and the Enabling Clause
79. We begin our analysis of the European Communities' appeal by examining its claim that the
Panel improperly characterized the relationshi p between Article I:1 of the GATT 1994 and the
Enabling Clause, and thus improperly allocated the burden of proof in this dispute.
A. The Panel's Analysis and the Arguments on Appeal
80. The Panel observed that the participants di sagree on whether the Enabling Clause constitutes
a "positive rule setting out obligations", or an "e xception" authorizing derogation from one or more
such positive rules. 160 Based on its understanding of the Appellate Body's decision in US – Wool
Shirts and Blouses, the Panel determined that the Enabling Clause, in and of itself, does not establish
legal obligations but, instead, contains requirements that are "only subsidiary obligations, dependent
on the decision of the Member to take [particular] measures".161 The Panel further concluded that the
legal function of the Enabling Clause is to permit Members to derogate from Article I:1 "so as to
enable developed countries, inter alia, to provide GSP to developing countries". 162 As a result, the
Panel found that the Enabling Clause is "in the nature of an exception" to Article I:1.163
81. The Panel noted that the GATT 1994 includes sever al provisions in the nature of exceptions
that serve to justify a measure's inconsistency with Article I:1, including Articles XX, XXI,
and XXIV, and the Enabling Clause. According to the Panel, these exceptions reflect "legitimate

158Panel Report, para. 7.161.
159Ibid., para. 7.176.
160Ibid., para. 7.32.
161Ibid., para. 7.37.
162Ibid., para. 7.38.
163Ibid., para. 7.39.

objectives" that may be pursued by Members. 164 The Panel reasoned that, because a complaining
party may not be able to discern the objectives of a given measure, particularly as they may not be
apparent from the text of the measure itself, it is "sufficient" for a complaining party to demonstrate
an inconsistency with Article I:1, without also establishing "violations" of any of the possible
exception provisions.165
82. With respect to the present dispute, the Panel found that India could make its case against the
European Communities solely by establishing the inconsistency of the Drug Arrangements with
Article I:1.166 Having done so, according to the Panel, it would then be incumbent upon the European
Communities to invoke the Enabling Clause as a defe nce and to demonstrate the consistency of the
Drug Arrangements with the requirements contained in that Clause.167
83. The Panel also examined whether Article I:1 applies to a measure covered by the Enabling
Clause. It looked first to the ordinary meaning of the term "notwithstanding", as used in paragraph 1
of the Enabling Clause, and concluded on that b asis that the Enabling Clause takes precedence over
Article I "to the extent of conflict between the two provisions". 168 Nevertheless, the Panel declined to
assume the exclusion of the applicability of a "b asic GATT obligation" such as Article I:1 in the
absence of a textual indication of Members' intent to that effect. 169 Thus, it also referred to World
Trade Organization ("WTO") jurisprudence relating to other exception provisions, and concluded that
the relationship between these exceptions and the ob ligations from which derogation is permitted is
"one where both categories of provisions apply concu rrently to the same measure, but where, in the
case of conflict between these two categories of provisions, [the exception] prevails". 170 Accordingly,
the Panel concluded, on the basis of both the ordinary meaning of the text of the provision and WTO
case law, that Article I:1 applies to measures cove red by the Enabling Clau se and that the Enabling
Clause prevails over Article I:1 "to the extent of the conflict between [them]".
171

164Panel Report, para. 7.40.
165Ibid.
166Ibid.
167Ibid., para. 7.42.
168Ibid., para. 7.44. Paragraph 1 of the Enabling Clause provides:
Notwithstanding the provisions of Ar ticle I of the General Agreement,
contracting parties may accord differential and more favourable treatment to
developing countries, without according such treatment to other contracting
parties. (footnote omitted)
169Panel Report, para. 7.44.
170Ibid., para. 7.45.
171Ibid.

84. Finally, the Panel referred to the European Communities' reliance on the Appellate Body's
decisions in Brazil – Aircraft and EC – Hormones and distinguished those cases from the present
dispute. The Panel stated that the relationship between the provisions at issue in those cases was
"different" from the relationship it had found between Article I:1 and the Enabling Clause.
172 I n
particular, the Panel determined that, in the two ea rlier disputes, one provision "clearly exclude[d]"
the application of the other. 173 In contrast, the Panel had already found that the Enabling Clause does
not exclude the applicability of Article I:1. In these circumstances, the Panel suggested that the
Enabling Clause constitutes an "affirmative defence", in relation to which the responding party bears
the burden of proof if that party invokes the Enabling Clause to justify its challenged measure.174
85. On appeal, the European Communities challenges the Panel's finding that the Enabling Clause
is an "exception" 175 to Article I:1 of the GATT 1994 and that , therefore, the European Communities
must invoke the Enabling Clau se as an "affirmative defence" 176 to India's claim that the Drug
Arrangements are inconsistent with Article I:1. The European Communities submits that the
Enabling Clause is part of a "special regime for developing countries" 177, which "encourages" 178,
inter alia, the granting of tariff preferences by devel oped-country Members to developing countries.
As a result, the Enabling Clause ex ists "side-by-side and on an equa l level" with Article I:1, and
applies to the exclusion thereof, rather than as an exception thereto. 179 The European Communities
argues, therefore, that India is required to bring a claim under the Enabling Cl ause if it considers that
the European Communities' GSP scheme ha s nullified or impaired India's rights. 180 The European
Communities requests us to refrain from examining the consistency of the Drug Arrangements with
the requirements of the Enabling Clause because, according to the Europ ean Communities and as

172Panel Report, paras. 7.48-7.50.
173Ibid., para. 7.48. (See also, ibid., paras. 7.47-7.50) The Panel was referring to Articles 3.1(a) and
27.2(b) of the Agreement on Subsidies and Countervailing Measures (the "SCM Agreement "), as interpreted in
Appellate Body Report, Brazil – Aircraft , and Articles 3.1 and 3.3 of the Agreement on the Application of
Sanitary and Phytosanitary Measures (the " SPS Agreement "), as interpreted in Appellate Body Report,
EC – Hormones.
174Panel Report, para. 7.49.
175Ibid., para. 7.39.
176Ibid., para. 7.42.
178Ibid., para. 53.
179Ibid., para. 22.
180Ibid., para. 15(2).

allegedly acknowledged by India before the Panel, India did not bring a claim under the Enabling
Clause.181
86. India, by contrast, supports the Panel's understa nding of the relationship between Article I:1
and the Enabling Clause. India argues that para graph 2(a) of the Enabling Clause qualifies as an
"exception" because the conditions therein must be complied with only by Members adopting a
measure pursuant to the authorization granted by th at provision. This differs from the most-favoured
nation ("MFN") obligation in Article I:1. 182 Moreover, according to India, we are not precluded from
addressing the consistency of the Drug Arrangements with the Enabling Clause because, contrary to
the assertion of the European Communities, India did make a claim under that Clause before the
Panel.183 India submits that denying the Panel the "competence" 184 to evaluate this claim, even if the
Enabling Clause is not regarded as an exception, would be inconsistent with the objectives of WTO
dispute settlement, "namely to secure a 'prompt' a nd 'positive solution to a dispute', and 'achieve a
satisfactory settlement of the matter' in accordan ce with rights and oblig ations under the covered
agreements." 185 According to India, this is particul arly so because the European Communities had
been on notice throughout the Panel proceedings of India's position that the Drug Arrangements are
not justified by the Enabling Clause.186
B. Relevance of the Relationship Between Article I:1 of the GATT 1994 and the
Enabling Clause for the Allocation of the Burden of Proof
87. We begin our analysis of the relationship between Article I:1 of the GATT 1994 and the
Enabling Clause, and the attendant implications for the allocation of the burden of proof in this
dispute, by recalling the observation of the Appellate Body in US – Wool Shirts and Blouses:
[I]t is a generally-accepted canon of evidence in civil law, common
law and, in fact, most jurisdictions, that the burden of proof rests
upon the party, whether complaining or defending, who asserts the
affirmative of a particular claim or defence.
187

181European Communities' appellant's submission, paras. 3, 13(2), and 66.
182India's appellee's submission, paras. 36 and 39.
183Ibid., paras. 54-57.
185Ibid., para. 74 (quoting DSU, Arts. 3.3, 3.4, and 3.7). (footnotes omitted)
186Ibid., para. 73.
187Appellate Body Report, US – Wool Shirts and Blouses, p. 14, DSR 1997:I, at 335.

It is thus for the complaining party to raise a claim with respect to a particular obligation and to
prove that the responding party is acting inconsistently with that obligation. It is for the responding
party, if it so chooses, to raise a defence in r esponse to an allegation of inconsistency and to prove
that its challenged measure satisfies the conditions of that defence. Therefore, the question before us
is whether India must raise a "claim" and prove th at the Drug Arrangements are inconsistent with the
Enabling Clause, or whether the Eu ropean Communities must raise and prove, in "defence", that the
Drug Arrangements are consistent with the Enab ling Clause, in order to justify the alleged
inconsistency of the Drug Arrangements with Article I:1.
188
88. We recall that the Appellate Body has addressed the allocation of the burden of proof in
similar situations. In cases where one provision permits, in certain circumstances, behaviour that
would otherwise be inconsistent with an oblig ation in another provision, and one of the two
provisions refers to the other provision, the Appe llate Body has found that the complaining party
bears the burden of establishing that a challenge d measure is inconsistent with the provision
permitting particular behaviour only where one of the provisions suggests that the obligation is not
applicable to the said measure.
189 Otherwise, the permissive provision has been characterized as an
exception, or defence, and the onus of invoking it an d proving the consistency of the measure with its
requirements has been placed on the responding party. 190 However, this distinction may not always
be evident or readily applicable.
C. Characterization of the Enabling Clause
1. Text of Article I:1 and the Enabling Clause
89. In considering whether the Enabling Clause is an exception to Article I:1 of the GATT 1994,
we look, first, to the text of the provisions at i ssue. Article I:1, which embodies the MFN principle,
provides:

188We are not concerned here with the situation where a complaining party brings a challenge solely
under the provisions of the Enabling Clause, that is, withou t also claiming an inconsistency with Article I of the
GATT 1994.
189See Appellate Body Report, EC – Hormones , para. 104; Appellate Body Report, Brazil – Aircraft ,
paras. 139-141; and Appellate Body Report, EC – Sardines, para. 275.
190See Appellate Body Report, US – FSC (Article 21.5 – EC) , paras. 131-133; and Appellate Body
Report, US – Wool Shirts and Blouses, p.16, DSR 1997:I, at 337.

Article I
General Most-Favoured-Nation Treatment
1. With respect to customs du ties and charges of any kind
imposed on or in connection with importation or exportation or
imposed on the international transfer of payments for imports or
exports, and with respect to the method of levying such duties and
charges, and with respect to all rules and formalities in connection
with importation and exportation, and with respect to all matters
referred to in paragraphs 2 and 4 of Article III,* any advantage,
favour, privilege or immunity granted by any contracting party to any
product originating in or destined for any other country shall be
accorded immediately and unconditionally to the like product
originating in or destined for the territories of all other contracting
parties.
Article I:1 plainly imposes upon WTO Members the obligation to treat "like pr oducts ... equally,
irrespective of their origin".
191
90. We turn now to the Enabling Clause, which has become an integral part of the GATT 1994.192
Paragraph 1 of the Enabling Clause, which appli es to all measures authorized by that Clause,
provides:
Notwithstanding the provisions of Article I of the General
Agreement, contracting parties ma y accord differential and more
favourable treatment to developing countries, without according such
treatment to other contracting parties. (footnote omitted)
The ordinary meaning of the term " notwithstanding" is, as the Panel noted 193, "[i]n spite of, without
regard to or prevention by". 194 By using the word "notwithstanding", paragraph 1 of the Enabling

191Appellate Body Report, EC – Bananas III, para. 190.
192In response to questioning at the oral hearing, the participants and third participants agreed that the
Enabling Clause is one of the "other decisions of the CONTRACTING PARTIES" within the meaning of
paragraph 1(b)(iv) of the language of Annex 1A incorporating the GATT 1994 into the WTO Agreement. That
provision stipulates that:
1. The General Agreement on Tari ffs and Trade 1994 ("GATT 1994")
shall consist of:

(b) the provisions of the legal instruments set forth below that
have entered into force under the GATT 1947 before the date
of entry into force of the WTO Agreement:

 (iv) other decisions of the CONTRACTING PARTIES to
GATT 1947[.]
193See Panel Report, para. 7.44.
194Shorter Oxford English Dictionary , 5th ed., W.R. Trumble, A. Stevenson (eds.) (Oxford University
Press, 2002), Vol. 2, p. 1948.

Clause permits Members to provide "differential and more favourable treatment" to developing
countries "in spite of" the MFN obligation of Article I:1. Such treatment would otherwise be
inconsistent with Article I:1 because that treatme nt is not extended to all Members of the WTO
"immediately and unconditionally".
195 Paragraph 1 thus excepts Members from complying with the
obligation contained in Article I:1 for the purpo se of providing differential and more favourable
treatment to developing countries, provided that su ch treatment is in acco rdance with the conditions
set out in the Enabling Clause. As such, the Enabling Clause operates as an "exception" to Article I:1.
2. Object and Purpose of the WTO Agreement and the Enabling Clause
91. The European Communities' contention that the Enabling Clause is not in the nature of
an exception appears to be founded on the Euro pean Communities' understanding of the object
and purpose of the Marrakesh Agreement Establishing the World Trade Organization (the
"WTO Agreement ") and the Enabling Clause. We, too, look to the object and purpose of the WTO
Agreement and the Enabling Clause to clarify whether the Enabling Clause was intended to operate
as an exception to Article I:1.
92. The Preamble to the WTO Agreement provides that Members recognize:
... that there is need for 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[.]196 (emphasis added)
The Waiver Decision on the Generalized System of Preferences (the "1971 Waiver Decision") 197,
which provided the initial authorization under the GATT for developed countries' GSP schemes and is
explicitly referred to in footnote 3 of the Enabling Clause 198, offers relevant guidance in discerning
the object and purpose of the Enabling Clause. In the Preamble to the 1971 Waiver Decision, the
Contracting Parties recognized:

195GATT 1994, Art. I:1.
196Second recital. We note that Article XXXVI:3 of the GATT 1994 similarly provides:
There is need for positive efforts designed to ensure that less-developed
contracting parties secure a share in the growth in international trade
commensurate with the needs of their economic development.
197GATT Document L/3545, 25 June 1971, BISD 18S/24 (attached as Annex D-2 to the Panel Report).
198Footnote 3 of the Enabling Clause states:
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 beneficial to the developing countries" (BISD
18S/24).

... that a principal aim of the CONTRACTING PARTIES is
promotion of the trade and export earnings of developing countries
for the furtherance of their economic development;
[and recognized] further that individual and joint action is essential
to further the development of the economies of developing
countries[.]
199
We understand, therefore, that the Enabling Clause is among the "positive efforts" called for in the
Preamble to the WTO Agreement to be taken by developed-country Members to enhance the
"economic development" of developing-country Members.200
93. According to the European Communities, th e Enabling Clause, as the "most concrete,
comprehensive and important appli cation of the principle of Special and Differential Treatment",
serves "to achieve one of the fundamental objectives of the WTO Agreement". 201 In the view of the
European Communities, provisions that are excepti ons permit Members to adopt measures to pursue
objectives that are "not ... among the WTO Agreement's own objectives" 202; the Enabling Clause thus
does not fall under the category of exceptions. Pointing to this alleged difference between the role of
measures falling under the Enabling Clause and th at of measures falling under exception provisions
such as Article XX, the European Communities contends that the WTO Agreement does not "merely
tolerate" measures under the Enabling Clause, but rather "encourages" developed-country Members to
adopt such measures. 203 According to the European Commun ities, to require preference-granting
countries to invoke the Enabling Clause in order to justify or defend their GSP schemes cannot be
reconciled with the intention of WTO Members to encourage these schemes.
94. We note, however, as did the Panel 204, that WTO objectives may well be pursued through
measures taken under provisions characterized as exceptions. The Preamble to the WTO Agreement
identifies certain objectives that may be pursued by Members through measures that would have to be

199First and second recitals. Similarly, Article XXXVI:1(d) of the GATT 1994 provides:
[I]ndividual and joint action is essential to further the development of the
economies of less-developed contracting parties and to bring about a rapid
advance in the standards of living in these countries[.]
200We discuss further the role of the Enabling Clause in the context of the covered agreements, infra,
paras. 106-109.
202Ibid., para. 52.
203Ibid., para. 53.
204See Panel Report, para. 7.52.

justified under the "General Exceptions" of Article XX. For instance, one such objective is reflected
in the recognition by Members that the expansion of trade must be accompanied by:
... the optimal use of the world's resources in accordance with the
objective of sustainable development, [with Members] seeking both
to protect and preserve the environment and to enhance the means for
doing so in a manner consistent with their respective needs and
concerns at different levels of economic development[.]
205
95. As the Appellate Body observed in US – Shrimp , WTO Members retained Article XX(g)
from the General Agreement on Tariffs and Trade 1947 (the "GATT 1947") without alteration after
the conclusion of the Uruguay Round, being "fully aware of the importance and legitimacy of
environmental protection as a goal of national and international policy". 206 Article XX(g) of the
GATT 1994 permits Members, subject to certain c onditions, to take measures "relating to the
conservation of exhaustible natural resources if such measures are made effec tive in conjunction with
restrictions on domestic production or consumption". It is well-establis hed that Article XX(g) is an
exception in relation to which the responding party bears the burden of proof.207 Thus, by authorizing
in Article XX(g) measures for environmental conser vation, an important objective referred to in the
Preamble to the WTO Agreement, Members implicitly recognized that the implementation of such
measures would not be discouraged simply because Article XX(g) constitutes a defence to otherwise
WTO-inconsistent measures. Likewise, character izing the Enabling Clause as an exception, in our
view, does not undermine the importance of the Enab ling Clause within the overall framework of the
covered agreements and as a "positive effort" to enhance economic deve lopment of developing-
country Members. Nor does it "discourag[e]" 208 developed countries from adopting measures in
favour of developing countries under the Enabling Clause.
96. The European Communities acknowledges that requiring Members to pursue environmental
measures through Article XX(g), an exception provision, may be logical because "the WTO
Agreement is not an environmental agreement a nd ... it contains no positive regulation of
environmental matters." 209 Because the WTO Agreement "regulate[s] positively the use of trade

205WTO Agreement, Preamble, first recital.
207Ibid., para. 157; Appellate Body Report, US – Wool Shirts and Blouses , pp. 15-16, DSR 1997:I,
at 337 (referring to GATT Panel Report, Canada – FIRA , para. 5.20; GATT Panel Report, US – Section 337 ,
para. 5.27; GATT Panel Report, US – Malt Beverages , paras. 5.43 and 5.52; and Panel Report, US – Gasoline,
para. 6.20).
208United States' third participant's submission, para. 9.

measures" 210, however, and the Enabling Cl ause "promotes" the use of tr ade measures to further the
development of developing count ries, the European Communities argues that Members should not be
required to prove the consistency of their measures with the Enabling Clause.
97. We do not consider it relevant, for the purposes of determining whether a provision is or is
not in the nature of an exception, that the provisi on governs "trade measures" rather than measures of
a primarily "non-trade" nature. Indeed, in a prev ious appeal, the Appellate Body found that the
proviso to Article XVIII:11 of the GATT 1994—a provision authorizing quantitative restrictions
when taken in response to balance-of-payments difficulties—is a defence to be invoked by the
responding party.211 The fact that a provision regulates the use of "trade measures", therefore, does
not compel a finding that it is for the complaining pa rty to establish inconsistency with that provision,
rather than for the defending party to rely on it as a defence.
98. In sum, in our view, the characterization of the Enabling Clause as an exception in no way
diminishes the right of Members to provide or to receive "differential and more favourable treatment".
The status and relative importance of a given provision does not depend on whether it is
characterized, for the purpose of allocating the bur den of proof, as a claim to be proven by the
complaining party, or as a defence to be established by the responding party. Whatever its
characterization, a provision of the covered agreemen ts must be interpreted in accordance with the
"customary rules of interpretation of public inte rnational law", as required by Article 3.2 of the
Understanding on Rules and Procedures Go verning the Settlement of Disputes (the "DSU").
212
Members' rights under the Enabling Clause are not curtailed by requiring preference-granting
countries to establish in dispute settlement the cons istency of their preferential measures with the
conditions of the Enabling Clause. Nor does ch aracterizing the Enabling Clause as an exception

211Appellate Body Report, India – Quantitative Restrictions, paras. 134-136. We also note that GATT
panels determined Article XI:2(c) of the GATT 1947 to constitute an "exception", even though that provision
addresses "trade measures", namely quantitative restrictions. (See GATT Panel Report, Japan – Agricultural
Products I, para. 5.1.3.7; GATT Panel Report, EEC – Dessert Apples , para. 12.3; and GATT Panel Report,
Canada – Ice Cream and Yoghurt, para. 59)
212In this regard, we recall the Appellate Body's statement in EC – Hormones that:
... merely characterizing a treaty provis ion as an "exception" does not by
itself justify a "stricter" or "narrower" interpretation of that provision than
would be warranted by examination of the ordinary meaning of the actual
treaty words, viewed in context and in the light of the treaty's object and
purpose, or, in other words, by applying the normal rules of treaty
interpretation.
(Appellate Body Report, para. 104)

detract from its critical role in encouraging the granting of special and differential treatment to
developing-country Members of the WTO.
99. In the light of the above, we uphold the Panel's finding, in paragraph 7.53 of the Panel
Report, that the Enabling Clause is an "exception" to Article I:1 of the GATT 1994.
100. We examine now the European Communities' appeal regarding the Panel's finding that the
Enabling Clause "does not exclude the applicability" of Article I:1 of the GATT 1994.
213 The
European Communities argues that th e Enabling Clause exists "side-by -side and on an equal level"
with Article I:1, and thus applies to the exclusion of that provision. 214 In our view, the European
Communities misconstrues the relationship between the two provisions.
101. It is well settled that the MFN principle embodied in Article I:1 is a "cornerstone of the
GATT" and "one of the pillars of the WTO trading system" 215, which has consistently served as a key
basis and impetus for concessions in trade negotiati ons. However, we recognize that Members are
entitled to adopt measures providing "differential and more favourable treatment" under the Enabling
Clause. Therefore, challenges to such measures, brought under Article I:1, cannot succeed where
such measures are in accordance with the terms of the Enabling Clause. In our view, this is so
because the text of paragraph 1 of the Enabling Clau se ensures that, to the extent that there is a
conflict between measures under the Enabling Clause and the MFN obligation in Article I:1, the
Enabling Clause, as the more specific rule, prevails over Article I:1. In order to determine whether
such a conflict exists, however, a dispute settleme nt panel should, as a first step, examine the
consistency of a challenged measure with Article I:1, as the general rule. If the measure is considered
at this stage to be inconsistent with Article I: 1, the panel should then examine, as a second step,
whether the measure is nevertheless justified by the En abling Clause. It is only at this latter stage that
a final determination of consistency with the Enabling Clause or in consistency with Article I:1 can be
made.

213Panel Report, para. 7.53.
215Appellate Body Report, Canada – Autos , para. 69. See also, Appellate Body Report, US – Section
Like the national treatment obligation, the obligation to provide most-
favoured-nation treatment has long been one of the cornerstones of the
world trading system. For more than fifty years, the obligation to provide
most-favoured-nation treatment in Article I of the GATT 1994 has been
both central and essential to assuring the success of a global rules-based
system for trade in goods.

102. In other words, the Enabling Clause "does not exclude the applicability" 216 of Article I:1 in
the sense that, as a matter of procedure (or "order of examination", as the Panel stated 217), the
challenged measure is submitted successively to the test of compatibility with the two provisions.
But, as a matter of final determination—or application rather than applicability—it is clear that only
one provision applies at a time. This is what th e Panel itself found when, after stating that "as an
exception provision, the Enabling Clause applies concurrently with Article I:1", it added "and takes
precedence to the extent of the conflict between the two provisions." 218
103. It is with this understanding, therefore, that we uphold the Panel's finding, in paragraph 7.53
of the Panel Report, that the Enabling Clause "does not exclude the applicability" of Article I:1 of the
GATT 1994.
D. Burden of Proof
104. We now examine the implications of the rela tionship between Article I:1 of the GATT 1994
and the Enabling Clause for the allocation of the burden of proof in this dispute. As a general rule,
the burden of proof for an "exception" falls on the r espondent, that is, as the Appellate Body stated in
US – Wool Shirts and Blouses , on the party "assert[ing] the affirmative of a particular ... defence". 219
From this allocation of the burden of proof, it is normally for the respondent, first, to raise the
defence and, second, to prove that the challenged measure meet s the requirements of the defence
provision.
105. We are therefore of the view that the European Communities must prove that the Drug
Arrangements satisfy the conditions set out in the Enab ling Clause. Consistent with the principle of
jura novit curia 220, it is not the responsibility of the European Communities to provide us with the

216Panel Report, para. 7.53.
217Ibid., para. 7.45.
218Ibid. (emphasis added)
219Appellate Body Report, p. 14, DSR 1997:I, at 335. (See also, Appellate Body Report, US – FSC
(Article 21.5 – EC), para. 133; and Appellate Body Report, India – Quantitative Restrictions, para. 136)
220The principle of jura novit curia has been articulated by the International Court of Justice as
follows:
It being the duty of the Court itself to ascertain and apply the relevant law in
the given circumstances of the case, the burden of establishing or proving
rules of international law cannot be imposed upon any of the parties, for the
law lies within the judicial knowledge of the Court.
(International Court of Justice, Merits, Case Concerning Military and Paramilitary Activities in and against
Nicaragua (Nicaragua v. United States of America) , 1986 ICJ Reports, p. 14, para. 29 (quoting International
Court of Justice, Merits, Fisheries Jurisdiction Case (United Kingdom of Great Britain and Northern Ireland v.

legal interpretation to be given to a particular provision in the Enabling Clause
 221; instead, the burden
of the European Communities is to adduce sufficien t evidence to substantiate its assertion that the
Drug Arrangements comply with the requirements of the Enabling Clause.
1. Responsibility for Raising the Enabling Clause
106. With respect to the legal responsibility for raising a defence as an issue in a dispute
settlement proceeding, however, we regard the par ticular circumstances of this case as dictating a
special approach, given the fundamental role of th e Enabling Clause in the WTO system as well as its
contents. The Enabling Clause authorizes develope d-country Members to grant enhanced market
access to products from developing countries beyond that granted to products from developed
countries. Enhanced market access is intended to provide developing countries with increasing
returns from their growing exports, which retu rns are critical for those countries' economic
development. The Enabling Clause thus plays a vital role in promoting trade as a means of
stimulating economic growth and de velopment. In this respect, the Enabling Clause is not a typical
"exception", or "defence", in the style of Article XX of the GATT 1994, or of other exception
provisions identified by the Appellate Body in previous cases.
107. A brief review of the history of the Enabling Clause confirms its special status in the covered
agreements. When the GATT 1947 entered into force, the Contracting Parties stated that one of its
objectives was to "rais[e] standards of living".
222 However, this objective was to be achieved in
countries at all stages of economic development through the universally-applied commitments
embodied in the GATT provisions. In 1965, the Contracting Parties added Articles XXXVI,
XXXVII, and XXXVIII to form Part IV of the GATT 1947, entitled "Trade and Development".
223
Article XXXVI expressly recognized the "need for pos itive efforts" and "individual and joint action"
so that developing countries would be able to shar e in the growth in international trade and further
their economic development. 224 Some of these "positive efforts" resulted in the Agreed Conclusions

221Compare Appellate Body Report, EC – Hormones, para. 156, which states:
[N]othing in the DSU limits the faculty of a panel freely to use arguments
submitted by any of the parties -- or to develop its own legal reasoning -- to
support its own findings and conclusions on the matter under its
consideration. A panel might well be unable to carry out an objective
assessment of the matter, as mandated by Article 11 of the DSU, if in its
reasoning it had to restrict itself solely to arguments presented by the parties
to the dispute.
222GATT 1947, Preamble, first recital.
223Protocol Amending the General Agreement on Tariffs and Trade to Introduce a Part IV on Trade
and Development, BISD 13S/2 (1965).
224GATT 1947, Arts. XXXVI:3 and XXXVI:1(d).

of the United Nations Conference on Trade and Development ("UNCTAD") Special Committee on
Preferences (the "Agreed Conclusions") 225, which recognized that pref erential tariff treatment
accorded under a generalized scheme of pref erences was key for developing countries " (a) to increase
their export earnings; (b) to promote their industrialization; and (c) to accelerate their rates of
economic growth." 226 The Agreed Conclusions also made clear that the achievement of these
objectives through the adoption of preferences by developed countries required a GATT waiver, in
particular, with respect to the MFN obligation in Article I:1. 227 Accordingly, the Contracting Parties
adopted the 1971 Waiver Decision in order to waiv e the obligations of Article I of the GATT 1947
and thereby authorize the granting of tariff preferences to developing countries for a period of ten
years.
228
108. In 1979, the Enabling Clause expanded the authorization provided by the 1971 Waiver
Decision to cover additional preferential measures a nd made the authorization a permanent feature of
the GATT. In his report at the conclusion of the Tokyo Round of negotiations, the then-Director
General observed:
The Enabling Clause meets a fundamental concern of developing
countries by introducing differentia l and more favourable treatment
as an integral part of the GATT system, no longer requiring waivers
from the GATT. It also provides th e perspective against which the
participation of developing countries in the trading system may be
seen.
229
Members reaffirmed the significance of the Enabli ng Clause in 1994 with the incorporation of the
Enabling Clause into the GATT 1994. 230 The relationship between trade and development, and in
particular the role of the Enabling Clause, remain prominent on the agenda of the WTO, as recognized
by the Doha Ministerial Conference in 2001.231
109. We thus understand that, between the entry in to force of the GATT and the adoption of the
Enabling Clause, the Contracting Parties determ ined that the MFN obligation failed to secure

225Attached as Annex D-4 to the Panel Report.
226Agreed Conclusions, para. I.2 (Panel Report, p. D-8).
227Ibid., paras. IX.1 and IX.2(c) (Panel Report, pp. D-13–D-14).
2281971 Waiver Decision, para. (a) (Panel Report, p. D-4).
229European Communities' appellant's submission, para . 25 (quoting Report by the Director-General of
GATT, in GATT, The Tokyo Round of Multilateral Trade Negotiations (1979), Vol. I, p. 99).
230Para. 1(b)(iv) of the language of Annex 1A to the WTO Agreement incorporating the GATT 1994
into the WTO Agreement.
231Ministerial Decision of 14 November 2001, Implementation-related Issues and Concerns ,
WT/MIN(01)/17, paras. 12.1-12.2.

adequate market access for developing countries so as to stimulate their economic development.
Overcoming this required recognition by the multilate ral trading system that certain obligations,
applied to all Contracting Parties, could impede rather than facilitate the objective of ensuring that
developing countries secure a share in the growth of world trade. This recognition came through an
authorization for GSP schemes in the 1971 Waiver D ecision and then in the broader authorization for
preferential treatment for developing countries in the Enabling Clause.
232
110. In our view, the special status of the Enab ling Clause in the WTO system has particular
implications for WTO dispute settlement. As we ha ve explained, paragraph 1 of the Enabling Clause
enhances market access for developing count ries as a means of improving their economic
development by authorizing preferential treatme nt for those countries, "notwithstanding" the
obligations of Article I. It is evident that a Member cannot implement a measure authorized by the
Enabling Clause without according an "advantage" to a developing country's products over those of a
developed country. It follows, therefore, that every measure undertaken pursuant to the Enabling
Clause would necessarily be inconsistent with Article I, if assessed on that basis alone, but it would be
exempted from compliance with Article I because it meets the requirements of the Enabling Clause.
Under these circumstances, we are of the view that a complaining party challenging a measure taken
pursuant to the Enabling Clause must allege more th an mere inconsistency with Article I:1 of the
GATT 1994, for to do only that would not convey th e "legal basis of the complaint sufficient to
present the problem clearly". 233 In other words, it is insuffici ent in WTO dispute settlement for a
complainant to allege inconsistency with Article I:1 of the GATT 1994 if the complainant seeks also
to argue that the measure is not justified under the Enabling Clause. This is especially so if the
challenged measure, like that at issue here, is plai nly taken pursuant to the Enabling Clause, as we
discuss infra.234
111. Furthermore, the history and objective of the Enabling Clause lead us to agree with the
European Communities 235 that Members are encouraged to deviate from Article I in the pursuit of
"differential and more favourable treatment" for de veloping countries. This deviation, however, is
encouraged only to the extent that it complies with the series of requirements set out in the Enabling

232We recognize that an exemptio n for developing countries from certain GATT obligations also
resulted from the 1954-1955 Review Session, where the Contracting Parties amended the GATT by adding
Article XVIII for the benefit of developing countrie s facing balance-of-payments difficulties or seeking to
nurture an infant industry. (See Reports Relating to the Review of the Agreement: Quantitative Restrictions,
GATT Document L/332/Rev.1 and Addenda, adopted 2, 4 and 5 March 1955, BISD, 3S/170, paras. 3, 35-36,
44, and 52)
233DSU, Art. 6.2. See also, Appellate Body Report, Korea – Dairy, paras. 120, 124, and 127.
234Infra, paras. 116-117.

Clause, requirements that we find to be more ex tensive than more typical defences such as those
found in Article XX.
112. Paragraph 2 of the Enabling Clause identifies the four types of measures to which the
authorization of paragraph 1 applies:
(a) Preferential tariff treatment accorded by developed
contracting parties to products originating in developing
countries in accordance with the Generalized System of
Preferences,3
(b) Differential and more favourable treatment with respect to the
provisions of the General Ag reement concerning non-tariff
measures governed by the provisions of instruments
multilaterally negotiated under the auspices of the GATT;
(c) Regional or global arrangemen ts entered into amongst less-
developed contracting parties for the mutual reduction or
elimination of tariffs and, in accordance 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 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 beneficial to the developing
countries" (BISD 18S/24).
Measures that a Member claims are exempt from a findi ng of inconsistency with Article I by virtue of
the Enabling Clause must fit within these sub-paragraphs , of which the most relevant for this case is
paragraph 2(a), which provides for GSP schemes. As we discuss in greater detail infra 236, this
provision requires the preferential treatment to be "in accordance with" the GSP and further defines
this obligation through each of the terms "gener alized, non-reciprocal and non discriminatory".
Paragraphs 2(b)-(d) impose different obligations to be satisfied by a Member taking a measure
pursuant to those provisions. Paragraph 3 identifies three conditions that must also be satisfied by
any measure under the Enabling Clause. Paragraph 4 sets forth procedural conditions for the
introduction, modification, or withdrawal of a preferential measure for developing countries.

236Infra, paras. 142-174.

Paragraphs 5 through 9 include obligations that are not necessarily related to measures providing
"differential and more favourable treatment".
237
113. In the light of the extensive requirements set fo rth in the Enabling Clause, we are of the view
that, when a complaining party considers that a preference scheme of another Member does not meet
one or more of those requirements, the specific provisions of the Enabling Clause with which the
scheme allegedly falls afoul, form critical com ponents of the "legal basis of the complaint"
 238 and,
therefore, of the "matter" in dispute.239 Accordingly, a complaining party cannot, in good faith, ignore
those provisions and must, in its request for the establishment of a panel, identify them and thereby
"notif[y] the parties and third parties of the nature of [its] case". 240 For the failure of such a
complaining party to raise the relevant provisions of the Enabling Clause would place an unwarranted
burden on the responding party. This due process consideration applies equally to the elaboration of a
complaining party's case in its written submissions, which must "explicitly" articulate a claim so that
the panel and all parties to a dispute "understand th at a specific claim has b een made, [are] aware of
its dimensions, and have an adequate opportunity to address and respond to it".241
114. Exposing preference schemes to open-ended challe nges would be inconsistent, in our view,
with the intention of Members, as reflect ed in the Enabling Clause, to "encourage" 242 the adoption of
preferential treatment for developing countries and to provide a practical means of doing so within the
legal framework of the covered agreements. Acco rdingly, although a responding party must defend
the consistency of its preference scheme with the conditions of the Enabling Clause and must prove
such consistency, a complaining party has to define the parameters within which the responding
party must make that defence.

237See Enabling Clause (attached as Annex 2 to this Report).
238DSU, Art. 6.2, which provides:
The request for the establishment of a panel shall be made in writing. It
shall indicate whether consultations were held, identify the specific
measures at issue and provide a brief summary of the legal basis of the
complaint sufficient to present the problem clearly. In case the applicant
requests the establishment of a panel with other than standard terms of
reference, the written request shall include the proposed text of special terms
of reference.
239Appellate Body Report, US – Carbon Steel , para. 125 (referring to Appellate Body Report,
Guatemala – Cement I, paras. 69-76).
240Ibid., para. 126 (referring to Appellate Body Report, Brazil – Desiccated Coconut, p. 22, DSR 1997:I,
at 186; and Appellate Body Report, EC – Bananas III, para. 142).
241Appellate Body Report, Chile – Price Band System, para. 164.

115. The responsibility of the complaining party in such an instance, however, should not be
overstated. It is merely to identify those provisions of the Enabling Clause with which the scheme is
allegedly inconsistent, without bearing the burden of establishing the facts necessary to support such
inconsistency. That burden, as we concluded above 243, remains on the responding party invoking the
Enabling Clause as a defence.
116. We observe, moreover, that the measure challe nged in this dispute is unmistakably a
preferential tariff scheme, granted by a developed-co untry Member in favour of developing countries,
and proclaiming to be in accordance with the GS P. The Drug Arrangements are found in Council
Regulation (EC) No. 2501/2001, the title of which indicates the Regulation to be "applying a scheme
of generalised tariff preferences for the period fro m 1 January 2002 to 31 December 2004". The first
recital in the Preamble to the Regulation provides:
Since 1971, the Community has gr anted trade preferences to
developing countries, in the framework of its scheme of generalised
tariff preferences.
In its original proposal for the Regulation, the European Commission explained:
In 1994, the Commission adopted some guidelines on the role of the
GSP for the ten-year period 1995 to 2004. A new regulation is
required in order to implement those guidelines for the remainder of
the period, i.e. the years 2002 to 2004. This memorandum is meant
to explain the proposal for that new regulation.
244 (footnote omitted;
emphasis added)
In its amended proposal, adding Pakistan to the list of beneficiaries under the Drug Arrangements, the
European Commission further stated:
Since the GSP drug regime was extended to the countries of the
Andean Community and to those of the Central American Common
Market, it provided an important incentive to allow for the
substitution of illicit crops, enhance exports in order to create jobs
not linked to drug production and trafficking and foster
diversification.

243Supra, para. 105.
244Explanatory Memorandum to the Proposal for a Council Regulation applying a scheme of
generalised tariff preferences for the period 1 January 2002 to 31 December 2004, para. 1 (attached to Amended
Proposal for a Council Regulation applying a scheme of generalised tariff preferences for the period 1 January
2002 to 31 December 2004, 2001/0131 (ACC), at p. 3) (Exhibit India-7 submitted by India to the Panel).

The problems which Pakistan is facing today, are similar. The GSP
drug regime is therefore likely to stabilise its economic and social
structures and thus consolidate the institutions that uphold the rule of
law.
245 (emphasis added)
117. It is therefore clear, on the face of the Regulation and from official, publicly-available
explanatory documentation, that the Drug Arrangements challenged by India in this dispute are part of
a preferential tariff scheme implemented by the Eu ropean Communities pursuant to the authorization
in paragraph 2(a) of the Enabling Clause. As su ch, India would have been well aware that the Drug
Arrangements must comply with the requirements of the Enabling Clause, and that the European
Communities was likely to invoke the Enabling Clause in response to a challenge of inconsistency
with Article I:1. Indeed, India admitted as much before the Panel. 246 India also must have believed
that at least certain of those requirements were not being met and that, as a consequence, the
inconsistency of the Drug Arrangeme nts with Article I could not be justified. Accordingly, India, as
the complaining party, should reasonably have articu lated its claims of inconsistency with specific
provisions of the Enabling Clause at the outset of this dispute as part of its responsibility to "engage in
[dispute settlement] procedures in good faith in an effort to resolve the dispute".
247
118. In sum, although the burden of justifying the Drug Arrangements under the Enabling Clause
falls on the European Communities, India was required to do more than simply allege inconsistency
with Article I. India's claim of inconsistency w ith Article I with respect to the measure challenged
here is inextricably linked with its argument th at the Drug Arrangements do not satisfy the conditions
in the Enabling Clause and that, therefore, they cannot be justified as a derogation from Article I. In
the light of the above considerations, we are of the view that India was required to (i) identify, in its

245Explanatory Memorandum to the Amended Proposal for a Council Regulation applying a scheme of
generalised tariff preferences for the period 1 January 2002 to 31 December 2004, 2001/0131 (ACC), p. 2,
fourth and fifth recitals (Exhibit India-7 submitted by India to the Panel).
246See, for example, India's first written submission to the Panel, para. 44, which states: "[S]ince the
Drug Arrangements are part of the EC's GSP scheme, it ma y reasonably be assumed that the EC will invoke the
Enabling Clause as a defence."
247DSU, Art. 3.10. See also, Appellate Body Report, US – FSC, para. 166, which reads:
Article 3.10 of the DSU commits Member s of the WTO, if a dispute arises,
to engage in dispute settlement procedures "in good faith in an effort to
resolve the dispute". This is another specific manifestation of the principle
of good faith which, we have pointed out, is at once a general principle of
law and a principle of general international law. This pervasive principle
requires both complaining and responding Members to comply with the
requirements of the DSU (and related requirements in other covered
agreements) in good faith. By good faith compliance, complaining Members
accord to the responding Members the full measure of protection and
opportunity to defend, contemplated by the letter and spirit of the procedural
rules. (footnote omitted)

request for the establishment of a panel, whic h obligations in the Enabling Clause the Drug
Arrangements are alleged to have c ontravened, and (ii) make writte n submissions in support of this
allegation. The requirement to make such an argument, however, does not mean that India must
prove inconsistency with a provision of the Enabling Clause, because the ultimate burden of
establishing the consistency of the Drug Arrange ments with the Enabling Clause lies with the
European Communities.
248
2. Whether India Raised the Enabling Clause Before the Panel
119. We turn now to examine whether, in fact, India fulfilled these requirements and thereby
sufficiently identified the scope of its claim before the Panel. In its request for consultations, India
claimed that the Drug Arrangements and the speci al incentive arrangements for the protection of
labour rights and the environment "nullify or impa ir the benefits accruing to India under the most-
favoured-nation provisions of Article I:1 of the GATT 1994 and paragraphs 2(a), 3(a) and 3(c) of the
Enabling Clause." 249 In its request for the establishment of a panel, India asked that a panel examine
whether the aforementioned arrangements of the Eur opean Communities' GSP scheme "are consistent
with Article I:1 of the GATT 1994 and the requirement s set out in paragraphs 2(a), 3(a) and 3(c) of
the Enabling Clause". 250 The Panel's terms of reference, therefore, included India's allegations that
certain aspects of the European Communities' G SP scheme were not "consistent" with, or did not
"meet the requirements set out in", paragraphs 2(a), 3(a), and 3(c) of the Enabling Clause.251

248Compare Appellate Body Report, US – Certain EC Products, para. 114, which states:
On the basis of our review of the European Communities' submissions and
statements to the Panel, we conclude that the European Communities did
not specifically claim before the Panel that, by adopting the 3 March
Measure, the United States acted incons istently with Article 23.2(a) of the
DSU. As the European Communities did not make a specific claim of
inconsistency with Article 23.2(a), it did not adduce any evidence or
arguments to demonstrate that the United States made a "determination as
to the effect that a violation has occurred" in breach of Article 23.2(a) of the
DSU. And, as the European Communities did not adduce any evidence or
arguments in support of a claim of violation of Article 23.2(a) of the DSU,
the European Communities could not have established, and did not
establish, a prima facie case of violation of Article 23.2(a) of the DSU.
(footnotes omitted; emphasis added)
249Request for consultations by India, WT/DS246/1, 12 March 2002, p. 1.
250Request for the establishment of a panel by India, WT/DS246/4, 9 December 2002, p. 2. In addition
to the Drug Arrangements and the speci al incentives for the protection of labour rights and the environment,
India also challenged the WTO-consistency of "any im plementing rules and regulations, ... any amendments to
any of the foregoing, and ... their application". (Ibid.)
251Request for the establishment of a panel by India, WT/DS246/4, 9 December 2002, pp. 1-2. The
Panel's terms of reference incorporated these allega tions by reference to document WT/DS246/4. (Constitution
of the panel established at the request of India, WT/DS246/5, 6 March 2003, para. 2)

120. In its written submissions before the Panel, India clearly invoked paragraph 2(a) of the
Enabling Clause as the basis for its allegation that the Drug Arrangements are not "justified" by the
Enabling Clause.
252 For example, in its first written submission before the Panel, India stated:
The tariff preferences under the Drug Arrangements are beneficial to
some developing countries and detrimental to others and
consequently do not comply with paragraph 2(a) of the Enabling
Clause.253
121. India's second written submission before the Pane l included a sub-heading entitled, "The EC
has failed to demonstrate that under the Drug Arra ngements it accords tariff treatment that is 'non-
discriminatory' within the meaning of paragraph 2(a) of the Enabling Clause". 254 Under this sub-
heading, India argued:
[P]aragraph 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 not envisage selectivity. Instead, it requires
that preferential tariff treatment is accorded to all developing
countries.
255 (original italics)
India further argued that, even if the European Co mmunities' interpretation of paragraph 2(a) were
correct, the Drug Arrangements would not be "non -discriminatory", as required by footnote 3 to
paragraph 2(a).256
122. We find that India acted in good faith, in its wr itten submissions before the Panel, explaining
why, in its view, the Drug Arrangements fail to meet certain requirements of the Enabling Clause,
namely, those present in paragraph 2(a). Such an e xplanation, in our view, was sufficient to place the
European Communities on notice as to the reasons underlying India's allegation that the Drug
Arrangements are not justified by the relevant provi sion of the Enabling Clause. With such notice,

252India's first written submission to the Panel, head ing IV.C. and para. 67; India's second written
submission to the Panel, heading III.B. and para. 164. By the time of its first written submission to the Panel,
India had indicated to the European Communities and to the Panel that this dispute was limited to the WTO-
consistency of the Drug Arrangements, but that India reserved its right to challenge the special incentives for the
protection of labour rights and the environment in a future dispute settlement proceeding. (See supra, para. 4;
and Panel Report, para. 1.5) Both participants confirmed, in response to questioning at the oral hearing, that the
measure at issue in this dispute was limited to the Drug Arrangements.
253India's first written submission to the Panel, para. 62.
254India's second written submission to the Panel, heading III.B.3.
255Ibid., para. 95.
256Ibid., paras. 119-128.

the European Communities could be expected to defend its challenged measure under the Enabling
Clause, in relation to which the European Communities ultimately bears the burden of justification.
123. In allocating the burden of proof, therefore, we conclude that India was required to raise the
Enabling Clause in making its claim of inconsistency with Article I:1. Once India had identified, in
its panel request and through argumentation in its wr itten submissions, the releva nt obligations of the
Enabling Clause that it claims were not satis fied by the Drug Arrangements, the European
Communities was then required to prove that the Drug Arrangements met those obligations, having
chosen to rely on the Enabling Clause as a defence.
124. Finally, we observe that the European Communitie s' appeal of the Panel's conclusion that the
Drug Arrangements are inconsistent with Article I:1 of the GATT 1994 is "based on" the European
Communities' claim that the Panel erroneously found th at (i) the Enabling Clause is an "exception" to
Article I:1; (ii) the Enabling Clause "does not exclud e the applicability" of Article I:1; and (iii) the
European Communities had the burden of proving the consistency of the Drug Arrangements with
that Clause. 257 As we have not reversed an y of these findings of the Panel 258, we do not need to
review further and we do not rule on the Panel's conclusion that the Drug Arrangements are
inconsistent with Article I:1 of the GATT 1994.259
125. For these reasons, we modify the Panel's finding, in paragra ph 7.53 of the Panel Report, that
"the European Communities bears the burden of invoking the Enabling Clause and justifying its Drug
Arrangements under that provision." We find that it was incumbent upon India to raise the
Enabling Clause in making its claim of inconsistency with Article I:1 of the GATT 1994, but that the

257In its Notice of Appeal, the European Communities' reference to Article I:1 was limited to its
decision to:
... seek[] review of the Panel's legal conclusion that [the Drug
Arrangements] are inconsistent with Article I:1 ... This conclusion is based
on the following erroneous legal findings:
- that the Enabling Clause is an "exception" to Article I:1 of the GATT;
- that the Enabling Clause does not exclude the applicability of
Article I:1 of the GATT;
- that the EC had the burden of proving that the Drug Arrangements
were consistent with the Enabling Clause.
(Notification of an appeal by the European Commun ities, WT/DS246/7, 8 January 2004, p.1 (attached as
Annex 1 to this Report))
258Supra, paras. 99, 103, and 123.
259Panel Report, paras. 7.60 and 8.1(b). The Eur opean Communities confirmed, in response to
questioning at the oral hearing, that it is not appealing the Panel's conclusion, in paragraph 7.60 of the Panel
Report, that the tariff advantages under the Drug Arrangements are inconsistent with Article I:1 because they are
not accorded "unconditionally" to the like products originating in all other WTO Members.

European Communities bore the burden of proving that the Drug Arrangements satisfy the
conditions of the Enabling Clause, in order to jus tify those Arrangements under that Clause. We
find, further, that India sufficiently raised paragr aph 2(a) of the Enabling Clause in making its claim
of inconsistency with Article I:1 before the Panel. We turn now to examine whether the European
Communities met its burden of justifying the Drug Arrangements under that provision.
V. Whether the Drug Arrangements are Justified Under the Enabling Clause
126. The European Communities "appeals subsidiarily" the Panel's finding that the Drug
Arrangements are not justified under paragraph 2(a), should we "conclude that the Enabling Clause is
an exception to GATT Article I:1, or that Indi a made a valid claim under the Enabling Clause".
260
Having found that the Enabling Clause is in the nature of an exception to Article I:1 of the
GATT 1994, we proceed to examine the European Comm unities' appeal as it relates to paragraph 2(a)
of the Enabling Clause.
127. The European Communities challenges three of the Panel's findings, namely that:
(a) "the term 'non-discriminatory' in foot note 3 [to paragraph 2(a) of the Enabling
Clause] requires that identical tariff pref erences under GSP schemes be provided to
all developing countries without differentia tion, except for the implementation of
a priori limitations" 261;
(b) "the term 'developing countries' in para graph 2(a) [of the Enabling Clause] should be
interpreted to mean all developing countries, with the exception that where
developed countries are implementing a prio ri limitations, 'developing countries' may
mean less than all developing countries" 262; and, ultimately, that
(c) the European Communities failed "to demonstrate that the Drug Arrangements are
justified under paragraph 2(a) of the Enabling Clause".263

261Panel Report, paras. 7.161 and 7.176.
263Ibid., para. 8.1(d).

128. Before addressing these specific issues, we will identify the precise scope of the appeal before
us. In doing so, we note that both the Europ ean Communities and India agree that, in addressing
paragraph 2(a) of the Enabling Clause, the Panel implicitly made findings on issues that were not
before it. Thus, India submits that "[t]he issue before the Panel was not whether the EC could exclude
from its GSP scheme countries claiming developing country status." 264 In India's view, that issue did
not arise "because India and all the countries enjoying tariff preferences under the Drug Arrangements
are beneficiaries under the EC's GSP scheme." 265 Also not before the Panel, according to India, was
"whether the EC's mechanisms for the graduation of developing countries meet the requirements of
the Enabling Clause." 266 India emphasizes that it "did not submit any claims on these issues to the
Panel because they are not relevant to the resolution of this dispute." 267 In other words, according to
India, the legal issues raised in this dispute "relate exclusively" 268 to the treatment of those countries
that a preference-granting country has included in its GSP scheme as beneficiaries. The European
Communities echoes India's concern that the Panel read obligations into the Enabling Clause "in
respect of issues which had not been raised by any of the parties and which [the Panel] did not have to
address in order to resolve the dispute".269
129. Against this background, we understand India's claim before the Panel to have been limited to
the consistency of the Drug Arrangements with th e term "non-discriminatory" in footnote 3 to
paragraph 2(a) of the Enabling Clause.270 In particular, India's challenge to the Drug Arrangements is
based on its submission that the term "non-discriminatory" prevents preference-granting countries
from according preferential tariff treatment to any beneficiary of their GSP schemes without granting
identical preferential tariff treatment to all other beneficiaries. Therefore, in this Report, we do not
rule on whether the Enabling Clause permits ab initio exclusions from GSP schemes of countries
claiming developing country status, or the partial or total withdrawal of GSP benefits from certain
developing countries under certain conditions.

265Ibid.
266India's opening statement at the oral hearing. By "graduation", we understand India to refer to the
withdrawal of preferen tial tariff treatment with respect to specific products or designated developing countries
on grounds of the degree of their development.
267India's opening statement at the oral hearing.
270See supra, paras. 120-122.

130. We note, moreover, that the European Communities has not appealed the Panel's
interpretation of paragraph 3(c) of the Enabling Clause.
271 Instead, the Eur opean Communities has
invoked that provision solely as "contextual support" for its interpretation of "non-discriminatory" in
footnote 3.272 We also note that the Panel made no findings in this case as to whether the Drug
Arrangements are inconsistent with paragraph 3(a) or 3(c) of the Enabling Clause. Our mandate,
pursuant to Article 17.6 of the DSU, is limited to "issues of law covered in the panel report and legal
interpretations developed by the panel". Therefore, in this appeal, we are not required to, and we shall
not address, the issue of whether the Drug Arrangement s are consistent with paragraphs 3(a) and 3(c)
of the Enabling Clause. This does not prevent us, of course, from examini ng those paragraphs as
context for our interpretation of "non-discriminatory" in footnote 3.
131. With these considerations in mind, we turn to address the meaning of the term "non-
discriminatory" in footnote 3. In doing so, we cons ider it useful to begin our analysis by setting out
briefly the relevant findings of the Panel.
A. Panel Findings
132. The Panel stated at the outset that "[t]he 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." 273 Paragraph 2(a) reads:
2. The provisions of paragraph 1 apply to the following:
 (a) Preferential tariff treatment accorded by developed
contracting parties to products orig inating in developing countries in
accordance with the Generalized System of Preferences,3
 3 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 beneficial to the developing
countries" (BISD 18S/24). (footnote 2 omitted)

271The European Communities refers to the Panel's finding, in paragraph 7.99 of the Panel Report, that
paragraph 3(c) requires preference-granting countries to "provide product coverage and tariff cuts at levels in
general no less than those offered and accepted in the Agreed Conclusions." The European Communities
explains that "[s]ince this issue was not raised by India and is not directly relevant to the issues in dispute, ... the
EC has not deemed [it necessary] to appeal it." (European Co mmunities' appellant's submission, footnote 40 to
para. 47)
273Panel Report, para. 7.65.

133. The Panel went on to examine, not the language of those provisions, but the meaning of
paragraph 3(c) of the Enabling Clause, which reads:
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.
The Panel explained that "[i]t is only possible to gi ve a full meaning to paragraph 2(a) and footnote 3
after determining whether paragr aph 3(c) allows differentiation among developing countries in
'respond[ing] positively to the development, financial and trade needs of developing countries'."
 274
134. Having found that the text of paragraph 3( c) "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" 275, the Panel proceeded to examine "the drafting history in UNCTAD ... to
identify the intention of the drafters on issues relating to the GSP arrangements." 276 The Panel
concluded that paragraph 3(c) allows for diffe rentiation among beneficiaries for the purposes of
granting preferential treatment to least-developed countries and setting a priori import limitations for
products originating in particularly competitive deve loping countries. The Panel asserted that "[n]o
other differentiation among developing countries is permitted by paragraph 3(c)." 277
135. Having made these findings based on its review of what it considered the "context" and
"preparatory work" 278 of paragraph 3(c) of the Enabling Clause, the Panel turned to examine
paragraph 2(a) and footnote 3 thereto. The Panel observed that the word "discriminate ... 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." 279 In order to determine th e appropriate meaning of the

274Panel Report, para. 7.65 (quoting Enabling Clause, para. 3(c) (attached as Annex 2 to this Report)).
In a footnote, the Panel explained fu rther that "[t]he European Communities argue[d] that 'if the term "non-
discriminatory" was interpreted as prohibiting any difference in treatment between developing countries,
developed countries would be effectively precluded from responding positively to those needs, thus rendering
[to] a nullity the requirement set forth in paragraph 3(c)'." ( Ibid., footnote 291 to para. 7.65 (quoting European
Communities' first written submission to the Panel, para. 71))
275Ibid., para. 7.78. (original italics)
276Ibid., para. 7.80.
277Ibid., para. 7.116.
278Ibid., para. 7.88.
279Ibid., para. 7.126. (original italics)

term "non-discriminatory" as used in footnote 3, th e Panel turned to the context of that term.
According to the Panel, this context includes paragr aphs 2(a), 2(d), and 3(c) of the Enabling Clause,
with the "most relevant elements of context" being Resolution 21(II) of the Second Session of
UNCTAD ("Resolution 21(II)")
280 and the Agreed Conclusions. 281 Based on its review of these
documents, the Panel found that:
… the clear intention of the negotia tors 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.
282
136. The Panel concluded:
… 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.
283 (original
italics)
137. The Panel found further support for its conclusion in its previous analysis of paragraph 3(c) 284
and in paragraph 2(d) of the Enabling Clause, which provides:
2. The provisions of paragraph 1 apply to the following:

 ( 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. (footnote omitted)
The Panel stated that the term "non-discriminator y" cannot be interpreted "to permit preferential
treatment to less than all developing count ries without an explicit authorization". 285 According to the
Panel, "[s]uch explicit authorizati on is only provided for the benefit of the least-developed countries

280Resolution 21(II) of the Second Session of UN CTAD, entitled "Expansion and Diversification of
Exports of Manufactures and Semi-Manufactures of Developing Countries" (attached as Annex D-3 to the Panel
Report).
281Panel Report, para. 7.128.
282Ibid., para. 7.144.
283Ibid.
284Ibid., paras. 7.148-7.149.
285Ibid., para. 7.151.

in paragraph 2(d) of the Enabling Clause and for th e implementation of a priori limitations, as set out
in the Agreed Conclusions." 286
138. Turning to the "object and purpose" of the Enab ling Clause, the Panel considered that "the
objective of promoting the trade of developing coun tries and that of promoting trade liberalization
generally" 287 are relevant for the interpretation of the term "non-discriminatory". The Panel
determined, however, that the latter "contribut es more to guiding the interpretation of 'non-
discriminatory', given its function of preventing abuse in providing GSP." 288
139. The Panel found further support for its interpre tation in an examination of the "overall
practice" of preference-granting countries 289, which, according to the Panel, "suggests that there was a
common understanding of 'equal' trea tment to all developing countries except for a priori measures,
and that it was on this basis that the 1971 Waiver Decision was adopted." 290
140. Based on its analysis described above, the Panel found 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.291 (emphasis added)
141. Regarding the measure at issue in this dispute, the Panel found that:
... the European Communities' Drug Arrangements, as a GSP
scheme, do not provide identi cal tariff preferences to all developing
countries and that the differentiation is neither for the purpose of
special treatment to the least-devel oped 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[.]
292 (original italics)
Consequently, the Panel also found that "the European Communities has failed to demonstrate that the
Drug Arrangements are justified under paragraph 2(a) of the Enabling Clause".293

286Panel Report, para. 7.151.
287Ibid., para. 7.158.
288Ibid.
289Ibid., para. 7.159.
290Ibid.
291Ibid., para. 7.161.
292Ibid., para. 7.177.
293Ibid., para. 8.1(d).

B. Interpretation of the Term "Non-Discriminatory" in Footnote 3 to Paragraph 2(a) of
the Enabling Clause
142. We proceed to interpret the term "non-discriminatory" as it appears in footnote 3 to
paragraph 2(a) of the Enabling Clause.
143. We recall first that the Enabling Clause has become a part of the GATT 1994.
294 Paragraph 1
of the Enabling Clause authorizes WTO Members to provide "differential and more favourable
treatment to developing countries, without according such treatment to other WTO Members". As
explained above, such differential treatment is perm itted "notwithstanding" the provisions of Article I
of the GATT 1994. Paragraph 2(a) and footnote 3 thereto clarify that paragraph 1 applies to
"[p]referential tariff treatment accorded by develope d contracting parties to products originating in
developing countries in accordance with the Generalized System of Preferences"
 295, "[a]s described in
the [1971 Waiver Decision], relating to the establi shment of 'generalized, non-reciprocal and non
discriminatory preferences beneficial to the developing countries' ".296
144. The Preamble to the 1971 Waiver Decision in turn refers to "preferential tariff treatment" in
the following terms:
Recalling that at the Second UNCTAD, unanimous agreement was
reached in favour of the early est ablishment 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 of 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[.]297 (original italics; underlining added)
145. Paragraph 2(a) of the Enabling Clause provides, therefore, that, to be justified under that
provision, preferential tariff treatment must be "i n accordance" with the GSP "as described" in
the Preamble to the 1971 Waiver Decision. "Accordan ce" being defined in the dictionary as

294See supra, footnote 192.
295Enabling Clause, para. 2(a) (attached as Annex 2 to this Report).
296Ibid., footnote 3 to para. 2(a).
2971971 Waiver Decision, third and fourth recitals.

"conformity" 298, only preferential tariff treatment that is in conformity with the description
"generalized, non-reciprocal and non-discriminatory" treatment can be justified under paragraph 2(a).
146. In the light of the above, we do not ag ree with European Communities' assertion 299 that the
Panel's interpretation of the word "non-discriminatory" in footnote 3 of the Enabling Clause is
erroneous because the phrase "generalized, non-reciprocal and non discriminatory" in footnote 3
merely refers to the description of the GSP in the 1971 Waiver Decision and, of itself, does not
impose any legal obligation on preference-granting countries. Nor do we agree with the United States
that the Panel erred in "assum[ing]" that the te rm "non-discriminatory" in footnote 3 imposes
obligations on preference-granting countries, and that , instead, footnote 3 "is simply a cross-reference
to where the Generalized System of Preferences is described."
 300
147. We find support for our interpretation in the Fren ch version of paragraph 2(a) of the Enabling
Clause, requiring that the tariff preferences be accorded " conformément au Système généralisé de
préférences". The term "in accordance" is thus " conformément" in the French version. In addition,
the phrase "[a]s described in [the 1971 Waiver Decision]" in footnote 3 is stated as " [t]el qu'il est
Spanish version uses the terms " conformidad " and "[t]al como lo define la Decisión de las PARTES
CONTRATANTES de 25 de junio de 1971 ". In our view, the stronger, more obligatory language in
both the French and Spanish texts—that is, using " as defined in" rather than "as described in"—lends
support to our view that only preferential tariff tr eatment that is "generalized, non-reciprocal and non-
discriminatory" is covered under paragraph 2(a) of the Enabling Clause.301
148. Having found that the qualification of the GSP as "generalized, non-reciprocal and non
discriminatory" imposes obligations that must be fulfilled for preferential tariff treatment to be
justified under paragraph 2(a), we turn to address the Panel's finding that:

298Shorter Oxford English Dictionary , 5th ed., W.R. Trumble, A. Stevenson (eds.) (Oxford University
Press, 2002), Vol. 1, p. 15.
299European Communities' response to questioning at the oral hearing.
300United States' third participant's submission, para. 11.
301We further note the existence of a 1999 WTO waiver allowing developing countries to grant special
preferences to least-developed countries. (Waiver Decision on Pr eferential Tariff Treatment for Least-
Developed Countries, WT/L/304, 15 June 1999 (the "1999 LDC Waiver")) That waiver applies only to
"preferential tariff treatment ... provid ed on a generalized, non-reciprocal and non-discriminatory basis". ( Ibid.,
para. 2) As such, for tariff preferences to be justified thereunder, there is a requirement that the treatment be
accorded on a "generalized, non-reciprocal and non-discriminatory basis." (emphasis added) We see no reason
why developed countries would be permitted to provide preferential tariff treatment to developing countries
under the Enabling Clause other than on a "non-discrimin atory basis", when there is clearly a requirement for
 developing countries to provide such treatment to least-de veloped countries on a "non-discriminatory basis"
under the 1999 LDC Waiver.

... 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.
302 (emphasis added)
149. The European Communities maintains that "'non-discrimination' is not synonymous with
formally equal treatment" 303 and that "[t]reating differently situ ations which are objectively different
is not discriminatory." 304 The European Communities asserts th at "[t]he objective of the Enabling
Clause is different from that of Article I:1 of the GATT." 305 In its view, the la tter is concerned with
"providing equal conditions of competition for impor ts of like products originating in all Members",
whereas "the Enabling Clause is a form of Spec ial and Differential Treatment for developing
countries, which seeks the opposite result: to creat e unequal competitive opportunities in order to
respond to the special needs of developing countries." 306 The European Communities derives
contextual support from paragraph 3(c), which stat es that the treatment provided under the Enabling
Clause "shall ... be designed and, if necessary, m odified, to respond positively to the development,
financial and trade needs of developing countries. " The European Communities concludes that the
term "non-discriminatory" in footnote 3 "does not prevent the preference-giving countries from
differentiating between developing countries which have different development needs, where tariff
differentiation constitutes an adequate response to such differences."
 307
150. India, in contrast, asserts that "non-discrimin ation in respect of tariff measures refers to
formally equal[] treatment" 308 and that paragraph 2(a) of the Enabling Clause requires that
"preferential tariff treatment [be] app lied equally" among developing countries. 309 In support of its
argument, India submits that an interpretation of paragraph 2(a) of the Enabling Clause that authorizes
developed countries to provide "discriminatory tariff treatment in favour of the developing countries
but not between the developing countries gives full effect to both Article I of the GATT and
paragraph 2(a) of the Enabling Clause and minimises the conflict between them." 310 India
emphasizes that, by consenting to the adoption of the Enabling Clause, developing countries did not

302Panel Report, para. 7.161.
304Ibid.
305Ibid., para. 152.
306Ibid.
307Ibid., para. 188.
309Ibid., para. 106.
310Ibid., para. 92. (original italics)

"relinquish[] their MFN rights [under Article I of the GATT 1994] as between themselves, thus
permitting developed countries to discriminate between them." 311
151. We examine now the ordinary meaning of the term "non-discriminatory" in footnote 3 to
paragraph 2(a) of the Enabling Clause. As we observed, footnote 3 requires that GSP schemes under
the Enabling Clause be "generalized , non-reciprocal and non discriminatory". Before the Panel, the
participants offered competing defin itions of the word "discriminate". India suggested that this word
means "'to make or constitute a difference in or betw een; distinguish' and 'to make a distinction in the
treatment of different categories of peoples or things'." 312 The European Communities, however,
understood this word to mean "'to make a distincti on 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.' " 313
152. Both definitions can be considered as re flecting ordinary meanings of the term
"discriminate" 314 and essentially exhaust the relevant ordina ry meanings. The principal distinction
between these definitions, as the Panel noted, is that India's conveys a " neutral meaning of making a
distinction", whereas the European Communities' conveys a " negative meaning carrying the
connotation of a distinction that is unjust or prejudicial." 315 Accordingly, the ordinary meanings of
"discriminate" point in conflicting directions with respect to the propriety of according differential
treatment. Under India's reading, any differential treatment of GSP beneficiaries would be prohibited,
because such treatment necessarily makes a distinction between beneficiaries. In contrast, under the
European Communities' reading, differential treatment of GSP beneficiaries would not be prohibited
per se. Rather, distinctions would be impermissible only where the b asis for such distinctions was
improper. Given these divergent meanings, we do not regard the term "non-discriminatory", on its
own, as determinative of the permissibility of a preference-granting country according different tariff
preferences to different beneficiaries of its GSP scheme.
153. Nevertheless, at this stage of our analysis, we are able to discern some of the content of the
"non-discrimination" obligation based on the ordinary meanings of that term. Whether the drawing of

312Panel Report, para. 7.126 (quoting The New Shorter Oxford English Dictionary , L. Brown (ed.)
(Clarendon Press, 1993), Vol. 1, p. 689).
313Ibid. (quoting The New Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993),
Vol. 1, p. 689). (italics added by the Panel)
314See Shorter Oxford English Dictionary , 5th ed., W.R. Trumble, A. Stevenson (eds.) (Oxford
University Press, 2002), Vol. 1, p. 697.
315Panel Report, para. 7.126. (original italics)

distinctions is per se discriminatory, or whether it is di scriminatory only if done on an improper
basis, the ordinary meanings of "discriminate" c onverge in one important respect: they both suggest
that distinguishing among similarly-situated benefi ciaries is discriminatory. For example, India
suggests that all beneficiaries of a particular Memb er's GSP scheme are similarly-situated, implicitly
arguing that any differential treatment of such bene ficiaries constitutes discrimination. The European
Communities, however, appears to regard GSP benefi ciaries as similarly-situated when they have
"similar development needs".
316 Although the European Communities acknowledges that
differentiating between similarly-situated GSP benefi ciaries would be inconsis tent with footnote 3 of
the Enabling Clause, it submits that there is no inconsistency in diffe rentiating between GSP
beneficiaries with "different development needs". 317 Thus, based on the ordinary meanings of
"discriminate", India and the European Communities e ffectively appear to agree that, pursuant to the
term "non-discriminatory" in footnote 3, similarly- situated GSP beneficiaries should not be treated
differently.318 The participants disagree only as to the b asis for determining whether beneficiaries are
similarly-situated.
154. Paragraph 2(a), on its face, does not explicitly authorize or proh ibit the granting of different
tariff preferences to different GSP beneficiaries. It is clear from the ordinary meanings of "non-
discriminatory", however, that preference-granting countries must make available identical tariff
preferences to all similarly-situated beneficiaries.
155. We continue our interpretive analysis by turn ing to the immediate context of the term "non-
discriminatory". We note first that footnote 3 to paragraph 2(a) stipulates that, in addition to being
"non-discriminatory", tariff preferences provide d under GSP schemes must be "generalized".

317Ibid., para. 188.
318We note that the contrasting definitions proffered by the participants, as we ll as the convergence of
those definitions on the fact that similarly-situated entities should not be treated differently, find reflection in the
use of the term "discrimination" in general international law. In this respect, we note, as an example, the
definitions of "discrimination" provided by the European Communities, in footnotes 56 and 57 of its appellant's
submission:
56 ... Mere differences of treatm ent do not necessarily constitute
discrimination … discrimination may in general be said to arise where those
who are in all material respects the sa me are treated differently, or where
those who are in material respects different are treated in the same way.
(quoting R. Jennings and A. Watts (eds.), Oppenheim’s International Law , 9th ed. (Longman, 1992), Vol. I,
p. 378)
57 ... Discrimination occurs when in a legal system an inequality is
introduced in the enjoyment of a certain right, or in a duty, while there is no
sufficient connection between the inequality upon which the legal inequality
is based, and the right or the duty in which this inequality is made.
(quoting E.W. Vierdag, The Concept of Discrimination in International Law, (Martinus Nijhoff, 1973), p. 61)

According to the ordinary meaning of that term, tariff preferences provided under GSP schemes must
be "generalized" in the sense that they "apply more generally; [or] become extended in application".319
However, this ordinary meaning alone may not reflect the entire significance of the word
"generalized" in the context of footnote 3 of th e Enabling Clause, particul arly because that word
resulted from lengthy negotiations leading to the GSP. In this regard, we note the Panel's finding that,
by requiring tariff preferences under the GSP to be "generalized", developed and developing countries
together sought to eliminate existing "special" preferences that were granted only to certain
designated developing countries. 320 Similarly, in response to our questioning at the oral hearing, the
participants agreed that one of the objectives of the 1971 Waiver Decision and the Enabling Clause
was to eliminate the fragmented system of special preferences 321 that were, in general, based on
historical and political ties between developed countries and their former colonies.
156. It does not necessarily follow, however, that " non-discriminatory" should be interpreted to
require that preference-granting countries provide "identical" tariff preferences under GSP schemes to
"all" developing countries. In concluding othe rwise, the Panel assumed that allowing tariff
preferences such as the Drug Arrangements would n ecessarily "result [in] the collapse of the whole
GSP system and a return back to special pref erences favouring selected developing countries". 322 To
us, this conclusion is unwarranted. We observe th at the term "generalized" requires that the GSP
schemes of preference-granting countries remain generally applicable.323 Moreover, unlike the Panel,
we believe that the Enabling Clause sets out suffi cient conditions on the granting of preferences to
protect against such an outcome. As we discuss below 324, provisions such as paragraphs 3(a) and 3(c)

319Shorter Oxford English Dictionary , 5th ed., W.R. Trumble, A. Stevenson (eds.) (Oxford University
Press, 2002), Vol. 1, p. 1082.
320Panel Report, paras. 7.135-7.137. The Panel also observed that statements by developed and
developing countries indicated the aim of providing GSP schemes with a broad scope, encompassing the
granting of preferences by all developed countries to all developing countries. (Ibid., paras. 7.131-7.132)
321See also European Communities' appellant's submission, para. 175.
322Panel Report, para. 7.102.
323The European Communities argues in this respect that the GATT Contracting Parties and the WTO
Members have granted a number of waivers, as mentioned in the Panel Report, for tariff preferences that are
"confined ab initio and permanently to a limited number of developing countries located in a certain
geographical region". (European Communities' appellant's submission, paras. 184-185 (referring to Panel
Report, para. 7.160)) See also, Panel Report, footnote 31 to para. 4.32 (referring to Waiver Decision on the
Caribbean Basin Economic Recovery Act, GATT Document L/5779, 15 February 1985, BISD 31S/20, renewed
15 November 1995, WT/L/104; Waiver Decision on CARIBCAN, GATT Document L/6102, 28 November
1986, BISD 33S/97, renewed 14 October 1996, WT/L/185; Waiver Decision on the United States – Andean
Trade Preference Act, GATT Document L/6991, 19 March 1992, BISD 39S/385, renewed 14 October 1996,
WT/L/184; Waiver Decision on The Fourth ACP-EEC Convention of Lomé, GATT Document L/7604, 9
December 1994, BISD 41S/26, rene wed 14 October 1996, WT/L/186; and Waiver Decision on European
Communities – The ACP-EC Partnership Agreement, WT/MIN (01)/15), 14 November 2001.
324Infra, paras. 157-168.

of the Enabling Clause impose specific conditions on the granting of different tariff preferences
among GSP beneficiaries.
157. As further context for the term "non-discriminatory" in footnote 3, we turn next to
paragraph 3(c) of the Enabling Clause, which sp ecifies that "differential and more favourable
treatment" provided under the Enabling Clause:
... 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.
158. At the outset, we note that the use of the wo rd "shall" in paragraph 3(c) suggests that
paragraph 3(c) sets out an obligation for deve loped-country Members in providing preferential
treatment under a GSP scheme to "respond positiv ely" to the "needs of developing countries".
325
Having said this, we turn to consider whether the "development, financial and trade needs of
developing countries" to which preference-granti ng countries are required to respond when granting
preferences must be understood to cover the "needs" of developing countries collectively.
159. The Panel found that "the only appropriate way [under paragraph 3(c) of the Enabling Clause]
of responding to the differing development needs of developing countries is for preference-giving
countries to ensure that their [GSP ] schemes have sufficient breadth of product coverage and depth of
tariff cuts to respond positively to those differing needs." 326 In reaching this conclusion, the Panel
appears to have placed a great deal of significance on the fact that paragraph 3(c) does not refer to
needs of "individual" developing countries.327 The Panel thus understood that paragraph 3(c) does not
permit the granting of preferential tariff treatment exclusively to a sub-category of developing
countries on the basis of needs that are common to or shared by only those developing countries. We
see no basis for such a conclusion in the text of para graph 3(c). Paragraph 3( c) refers generally to
"the development, financial and trade needs of developing countries". The absence of an explicit
requirement in the text of paragraph 3(c) 328 to respond to the needs of "all" developing countries, or to

325We note that the European Communities agreed before the Panel that paragraph 3(c) of the Enabling
Clause sets forth a "requirement". (European Communitie s' first written submission to the Panel, paras. 71
and 149)
326Panel Report, para. 7.149. (See also, ibid., paras. 7.95-7.97 and 7.105)
327Ibid., para. 7.78.
328The United States refers to Article 3.2 of the DSU to support its argument that "panels are barred
from reading legal obligations into the Enabling Clause that are not found in the text." (United States' third
participant's submission, para. 13)

the needs of "each and every" 329 developing country, suggests to us that, in fact, that provision
imposes no such obligation.330
160. Furthermore, as we understand it, the participants in this case agree that developing countries
may have "development, financial and trade needs" that are subject to change and that certain
development needs may be common to only a certain number of developing countries. 331 We see no
reason to disagree. Indeed, paragraph 3(c) cont emplates that "differential and more favourable
treatment" 332 accorded by developed to developing countries may need to be "modified" in order to
"respond positively" to the needs of developing countries. Paragraph 7 of the Enabling Clause
supports this view by recording the expectation of "less-developed contracting parties" that their
capacity to make contributions or concessions under the GATT will "improve with the progressive
development of their economies and improvement in their trade situation". Moreover, the very
purpose of the special and differential treatment permitted under the Enabling Clause is to foster
economic development of developing countries. It is simply unrealistic to assume that such
development will be in lockstep for all developing countries at once, now and for the future.
161. In addition, the Preamble to the WTO Agreement, which informs all the covered agreements
including the GATT 1994 (and, hence, the Enab ling Clause), explicitly recognizes the "need for
positive efforts designed to ensure that developi ng countries, and especially the least developed
among them, secure a share in the growth in internat ional trade commensurate with the needs of their
economic development". 333 The word "commensurate" in this phrase appears to leave open the
possibility that developing countries may have di fferent needs according to their levels of
development and particular circumstances. The Preamble to the WTO Agreement further recognizes

329Panel Report, para. 7.105. (italics omitted)
330In this respect, we agree with the European Communities that paragraph 3(c) should "be interpreted
in a manner which, while preserving its relevance, is both workable for developed countries and consistent with
the requirements that the preferences be non-discriminatory." (European Communities' appellant's submission,
para. 138 (original italics))
331The European Communities emphasized before the Panel that the "development, financial and trade
needs of developing countries" referred to in paragraph 3(c) of the Enabling Clause "[o]bviously ... may vary
between different categories of developing countries, as well as over time." (European Communities' first
written submission to the Panel, para. 71) That "needs of developing countries" may change over time was also
acknowledged by India in response to our questioning at th e oral hearing. In addition, we understand India not
to disagree that developing countries may have different individual needs, given that it argues that
paragraph 3(c) should be interpreted as requiring "GSP schemes [to] respond to the needs of developing
countries as a whole and not their individual needs." (India's appellee's submission, para. 124)
332Enabling Clause, para. 1 (attached as Annex 2 to this Report).
333WTO Agreement, Preamble, second recital.

that Members' "respective needs and concerns at different levels of economic development"
 334 may
vary according to the different stages of development of different Members.
162. In sum, we read paragraph 3(c) as authoriz ing preference-granting countries to "respond
positively" to "needs" that are not necessarily common or shared by all developing countries.
Responding to the "needs of developing countries" may thus entail treating different developing-
country beneficiaries differently.
163. However, paragraph 3(c) does not authorize any kind of response to any claimed need of
developing countries. First, we observe that the ty pes of needs to which a response is envisaged are
limited to "development, financial and trade needs". In our view, a "need" cannot be characterized as
one of the specified "needs of developing countries" in the sense of paragraph 3(c) based merely on an
assertion to that effect by, for instance, a preference-granting country or a beneficiary country.
Rather, when a claim of inconsistency with paragra ph 3(c) is made, the existence of a "development,
financial [or] trade need" must be assessed according to an objective standard. Broad-based
recognition of a particular need, set out in the WTO Agreement or in multilateral instruments adopted
by international organizations, could serve as such a standard.335
164. Secondly, paragraph 3(c) mandates that the response provided to the needs of developing
countries be "positive". "Positive" is defined as "cons isting in or characterized by constructive action
or attitudes".336 This suggests that the res ponse of a preference-granting country must be taken with a
view to improving the development, financial or trade s ituation of a beneficiary country, based on
the particular need at issue. As such, in our view, the expectation that developed countries will
"respond positively" to the "needs of developing countries" suggests that a sufficient nexus should
exist between, on the one hand, the preferential treatment provided under the respective measure
authorized by paragraph 2, and, on the other hand, the likelihood of alleviating the relevant
"development, financial [or] trade need". In the c ontext of a GSP scheme, the particular need at issue
must, by its nature, be such that it can be effectiv ely addressed through tariff preferences. Therefore,
only if a preference-granting country acts in the "positive" manner suggested, in "respon[se]" to a

334WTO Agreement, Preamble, first recital.
335The European Communities argues that tariff prefer ences are an appropriate response to the drug
problem. In support of its argument, the European Communities refers to the Preamble to the Agreement on
Agriculture and the waiver for the United States' Andean Trad e Preference Act. In addition, the European
Communities finds support in several international conventions and resolutions that have recognized drug
production and drug trafficking as entailing particular problems for developing countries. (See Panel Report,
paras. 4.71-4.74; and European Communities' appellant's submission, paras. 144-149)
336Shorter Oxford English Dictionary , 5th ed., W.R. Trumble, A. Stevenson (eds.) (Oxford University
Press, 2002), Vol. 2, p. 2293.

widely-recognized "development, financial [or] trad e need", can such action satisfy the requirements
of paragraph 3(c).
165. Accordingly, we are of the view that, by requiring developed countries to "respond
positively" to the "needs of developing countri es", which are varied and not homogeneous,
paragraph 3(c) indicates that a GSP scheme may be "non-discriminatory" even if "identical" tariff
treatment is not accorded to "all" GSP beneficiarie s. Moreover, paragraph 3(c) suggests that tariff
preferences under GSP schemes may be "non-discriminatory" when the relevant tariff preferences are
addressed to a particular "development, financial [or] trade need" and are made available to all
beneficiaries that share that need.
166. India submits that developing countries should not be presumed to have waived their MFN
rights under Article I:1 of the GATT 1994 vis-à-vis other developing countries 337, and we make no
such presumption. In fact, we note that the Enabling Clause specifically allows developed countries
to provide differential and more favourable treatme nt to developing countries "notwithstanding" the
provisions of Article I. 338 With this in mind, and given that paragraph 3(c) of the Enabling Clause
contemplates, in certain circum stances, differentiation among GSP beneficiaries, we cannot agree
with India that the right to MFN treatment can be invoked by a GSP beneficiary vis-à-vis other GSP
beneficiaries in the context of GSP schemes that meet the conditions set out in the Enabling Clause.
167. Finally, we note that, pursuant to paragraph 3( a) of the Enabling Clause, any "differential and
more favourable treatment ... 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." This requirement applies, a fortiori , to any preferential treatment granted to one GSP
beneficiary that is not granted to another. 339 Thus, although paragraph 2(a) does not prohibit per se
the granting of different tariff preferences to different GSP beneficiaries 340, and paragraph 3(c) even
contemplates such differentiation under certain circumstances 341, paragraph 3(a) requires that any
positive response of a preference-granting country to the varying needs of developing countries not
impose unjustifiable burdens on other Members.

338Compare para. 1 of the Enabling Clause ("Notwithstanding the provisions of Article I") with
para. (a) of the 1971 Waiver Decision ("the provisions of Article I shall be waived ... to the extent necessary").
339We note in this respect that the language contained in paragraph 3(a) of the Enabling Clause is
reflected in waivers referred to in supra, footnote 323.
340Supra, paras. 153-154.
341Supra, paras. 162-165.

168. Having examined the context of paragraph 2(a) , we turn next to examine the object and
purpose of the WTO Agreement. We note first that paragraph 7 of the Enabling Clause provides that
"[t]he concessions and contri butions made and the obligatio ns assumed by developed and less-
developed contracting parties under the provisions of the [GATT 1994] should promote the basic
objectives of the [GATT 1994], including those embodied in the Preamble". As we have observed,
the Preamble to the WTO Agreement provides that there is "need for 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 w ith the needs of their economic development".
342
Similarly, the Preamble to the 1971 Waiver De cision provides that "a principal aim of the
CONTRACTING PARTIES is promotion of the trade and export earnings of developing countries for
the furtherance of their economic development". 343 These objectives are also reflected in
paragraph 3(c) of the Enabling Clause, which stat es that the treatment provided under the Enabling
Clause "shall ... be designed and, if necessary, m odified, to respond positively to the development,
financial and trade needs of developing countries".
169. Although enhanced market access will contribute to responding to the needs of developing
countries collectively, we have also recognized that the needs of developing countries may vary over
time. We are of the view that the objective of improving developing countries' "share in the growth in
international trade", and their "trade and export ear nings", can be fulfilled by promoting preferential
policies aimed at those interests that developing countries have in common, as well as at those
interests shared by sub-categories of developing countries based on their particular needs. An
interpretation of "non-discriminatory" that does not require the granting of "identical tariff
preferences" 344 allows not only for GSP schemes providi ng preferential market access to all
beneficiaries, but also the possibility of additional preferences for developing countries with particular
needs, provided that such additional preferences ar e not inconsistent with other provisions of the
Enabling Clause, including the requirements that such preferences be "generalized" and "non-
reciprocal". We therefore consider such an interp retation to be consistent with the object and purpose
of the WTO Agreement and the Enabling Clause.
170. The Panel took the view, however, that the objective of "elimination of discriminatory
treatment in international commerce" 345, found in the Preamble to the GATT 1994, "contributes more

342WTO Agreement, Preamble, second recital.
3431971 Waiver Decision, Preamble, first recital.
344Panel Report, para. 7.161.
345Ibid., para. 7.157 (quoting GATT 1994, Preamble, second recital).

to guiding the interpretation of 'non-discriminatory' " 346 than does the objective of ensuring that
developing countries "secure ... a share in the growth in international trade commensurate with their
development needs." 347 We fail to see on what basis the Panel drew this conclusion.
171. We next examine the relevance of paragraph 2(d) of the Enabling Clause 348 for the
interpretation of "non-discriminatory" in footnote 3. The Panel characterized paragraph 2(d) as an
"exception" to paragraph 2(a) 349 and relied on paragraph 2(d) to su pport its view that paragraph 2(a)
requires "formally identical treatment". 350 In the Panel's view, if developed-country Members were
entitled under paragraph 2(a) to differentiate betwee n developing-country Members, then they would
have been entitled under that paragraph alone to differentiate between developing and least-developed
countries. Accordingly, "there would have been no need to include paragraph 2(d) in the Enabling
Clause." 351
172. We do not agree with the Panel that paragraph 2(d) is an "exception" to paragraph 2(a), or
that it is rendered redundant if paragraph 2(a) is interpreted as allowing developed countries to
differentiate in their GSP schemes between developing countries. To begin with, we note that the
terms of paragraph 2 do not expressly indicate that each of the four sub-pa ragraphs thereunder is
mutually exclusive, or that any one is an exception to any other. Moreover, in our view, it is clear
from several provisions of the Enabling Clause that the drafters wished to emphasize that least-
developed countries form an identifiable sub-category of developing countries with "special economic
difficulties and ... particular devel opment, financial and trade needs". 352 When a developed-country
Member grants tariff preferences in favour of deve loping countries under para graph 2(a), as we have
already found 353, footnote 3 imposes a requirement that such preferences be "non-discriminatory". In
the absence of paragraph 2(d), a Member granting pr eferential tariff treatment only to least-developed
countries would therefore need to establish, under pa ragraph 2(a), that this preferential treatment did
not "discriminate" against other developing countri es contrary to footnote 3. The inclusion of
paragraph 2(d), however, makes clear that devel oped countries may accord preferential treatment to

346Panel Report, paras. 7.157-7.158.
347Ibid., para. 7.155 (referring to WTO Agreement, Preamble, second recital).
348Paragraph 2(d) deals with special treatment of least-developed countries "in the context of any
general or specific measures in favour of developing countries".
349Panel Report, para. 7.147.
350Ibid., para. 7.145.
351Ibid., para. 7.145.
352Enabling Clause, para. 6 (attached as Annex 2 to this Report). Similarly, paragraph 8 of the
Enabling Clause refers to the "special economic situation and [the] development, financial and trade needs" of
least-developed countries.
353Supra, paras. 145-148.

least-developed countries distinct from the preferences granted to other developing countries under
paragraph 2(a). Thus, pursuant to paragraph 2(d), preference-granting countries need not establish
that differentiating between developing and least-d eveloped countries is "non-discriminatory". This
demonstrates that paragraph 2(d) does have an effe ct that is different and independent from that of
paragraph 2(a), even if the term "non-discriminatory" does not require the granting of "identical tariff
preferences"
 354 to all GSP beneficiaries.
173. Having examined the text and context of footnot e 3 to paragraph 2(a) of the Enabling Clause,
and the object and purpose of the WTO Agreement and the Enabling Clause, we conclude that the
term "non-discriminatory" in footnote 3 does not prohibit developed-country Members from granting
different tariffs to products originating in different GSP beneficiaries, provided that such differential
tariff treatment meets the remaining conditions in th e Enabling Clause. In granting such differential
tariff treatment, however, preference-granting countri es are required, by virtue of the term "non-
discriminatory", to ensure that identical treatme nt is available to all similarly-situated GSP
beneficiaries, that is, to all GSP beneficiaries that have the "development, financial and trade needs"
to which the treatment in question is intended to respond.
174. For all of these reasons, we reverse the Panel's finding, in paragraphs 7.161 and 7.176 of the
Panel Report, that "the term 'non-discriminatory' in footnote 3 [to paragraph 2(a) of the Enabling
Clause] requires that identical tariff preference s under GSP schemes be provi ded to all developing
countries without differentiation, except for the implementation of a priori limitations." 355
C. The Words "Developing Countries" in Paragraph 2(a) of the Enabling Clause
175. In addition to the Panel's interpretation of the term "non-discriminatory" in footnote 3 of the
Enabling Clause, the European Communities appeals the Panel's finding that "the term 'developing
countries' in paragraph 2(a) s hould be interpreted to mean all developing countries, [except as
regards] a priori limitations".356 The Panel's interpretation of pa ragraph 2(a) is premised on its
findings that (i) footnote 3 permits the granting of different tariff preferences to different GSP
beneficiaries only for the purpose of a priori limitations
 357, and (ii) paragraph 3(c) permits the
granting of different tariff preferences to different GSP beneficiaries only for the purposes of

354Panel Report, para. 7.161.
355Given our interpretation, which permits differentiation among GSP beneficiaries, it is not necessary
for us to rule on whether a priori limitations are permitted under the Enabling Clause. (See also, supra, paras.
128-129)
356Panel Report, para. 7.174. (original italics) See also, European Communities' appellant's submission,
para. 67.
357Panel Report, para. 7.170.

a priori limitations and preferential treatment in favour of least-developed countries. 358 We have
concluded, contrary to the Panel, th at footnote 3 and paragraph 3(c) do not preclude the granting of
differential tariffs to different sub-categories of GSP beneficiaries, subject to compliance with the
remaining conditions of the Enabling Clause. We find, therefore, that the term "developing countries"
in paragraph 2(a) should not be read to mean "all" developing countries and, accordingly, that
paragraph 2(a) does not prohibit preference-gran ting countries from according different tariff
preferences to different sub-categories of GSP beneficiaries.
176. Accordingly, we also reverse the Panel's finding, in paragr aph 7.174 of the Panel Report,
that "the term 'developing countries' in paragraph 2(a) [of the Enabling Clause] should be interpreted
to mean all developing countries, with the excep tion that where developed countries are
implementing a priori limitations, 'developing countries' may mean less than all developing
countries."
D. Consistency of the Drug Arrangements with the Enabling Clause
177. We turn next to examine the consistency of the Drug Arrangements with the Enabling Clause.
178. We recall that, with respect to the Enabling Cl ause, the only challenge by India before the
Panel related to paragra ph 2(a) and, in particular, footnote 3 thereto. 359 In response, the European
Communities argued that it found contextual support fo r its interpretation of paragraph 2(a) in the
requirement, contained in paragraph 3(c), to respond positively to the needs of developing
countries.360 In rejecting the European Communities' in terpretation of paragraph 2(a), the Panel did
not determine whether the Drug Arrangements satisfy the conditions set out in paragraph 3(c), but,
rather, limited its discussion of paragraph 3(c) to the relevance of that provision as context for its
interpretation of paragraph 2(a). Thus, the Panel ma de a finding of inconsistency only with respect to
paragraph 2(a) of the Enabling Clause. 361 The European Communities appeals this finding of
inconsistency with paragraph 2(a).
179. Although paragraph 3(c) informs the interpreta tion of the term "non-discriminatory" in
footnote 3 to paragraph 2(a), as detailed above 362, paragraph 3(c) imposes requirements that are

358Panel Report, para. 7.171.
359Supra, paras. 120-122.
360See Panel Report, para. 7.123; European Comm unities' first written submission to the Panel,
paras. 70-71 and 149; and European Communities' second written submission to the Panel, paras. 48-52.
361Panel Report, para. 8.1(d).
362Supra, paras. 157-162.

separate and distinct from those of paragraph 2( a). We have already concluded that, where a
developed-country Member provides additional ta riff preferences under its GSP scheme to respond
positively to widely-recognized "development, fina ncial and trade needs" of developing countries
within the meaning of paragraph 3(c) of the Enab ling Clause, this "positive response" would not, as
such, fail to comply with the "n on-discriminatory" requirement in footnote 3 of the Enabling
Clause
 363, even if such needs were not common or shared by all developing countries. We have also
observed that paragraph 3(a) requires that any pos itive response of a preferen ce-granting country to
the varying needs of developing countries not impose unjustifiable burdens on other Members. 364
With these considerations in mind, and recalling th at the Panel made no finding in this case as to
whether the Drug Arrangements are inconsistent w ith paragraphs 3(a) and 3(c) of the Enabling
Clause 365, we limit our analysis here to pa ragraph 2(a) and do not examine per se whether the Drug
Arrangements are consistent with the obligation contained in paragr aph 3(c) to "respond positively to
the development, financial and trade needs of deve loping countries" or with the obligation contained
in paragraph 3(a) not to "raise barriers" or "create undue difficulties" for the trade of other Members.
180. We found above that the term "non-discriminator y" in footnote 3 to paragraph 2(a) of the
Enabling Clause does not prohibit the granting of differ ent tariffs to products originating in different
sub-categories of GSP beneficiaries, but that identical tariff treatment must be available to all GSP
beneficiaries with the "development, financial [or] trade need" to which the differential treatment is
intended to respond.
366 The need alleged to be addressed by the European Communities' differential
tariff treatment is the problem of illicit drug production and trafficking in certain GSP beneficiaries.
In the context of this case, therefore, the Drug Arrangements may be found c onsistent with the "non-
discriminatory" requirement in footnote 3 only if the European Communities proves, at a minimum,
that the preferences granted under the Drug Arrangement s are available to all GSP beneficiaries that
are similarly affected by the drug problem.
367 We do not believe this to be the case.

363Supra, para. 165.
364Supra, para. 167.
365See supra, para. 134.
366Supra, para. 165.
367According to the European Communities, "the Drug Arrangements are non-discriminatory because
the designation of the beneficiary countries is based only and exclusively on their development needs. All the
developing countries that are similarly affected by the drug problem have been included in the Drug
Arrangements". (European Communities' appellant's submission, para. 186 (original italics))

181. By their very terms, the Drug Arrangements are limited to the 12 developing countries
designated as beneficiaries in Annex I to the Regulation. 368 Specifically, Article 10.1 of the
Regulation states:
Common Customs Tariff ad valorem duties on [covered products]
which originate in a country that according to Column I of Annex I
benefits from [the Drug Arrangements] shall be entirely suspended.
182. Articles 10 and 25 of the Regulation, which re late specifically to the Drug Arrangements,
provide no mechanism under which additional beneficiar ies may be added to the list of beneficiaries
under the Drug Arrangements as designated in Annex I. Nor does any of the other Articles of the
Regulation point to the existence of such a mech anism with respect to the Drug Arrangements.
Moreover, the European Communities acknowledged th e absence of such a mechanism in response to
our questioning at the oral hearing. This contr asts with the position under the "special incentive
arrangements for the protection of labour rights" and the "special incentive arrangements for the
protection of the environment", wh ich are described in Article 8 of the Regulation. The Regulation
includes detailed provisions setting out the procedure and substantive criteria that apply to a request
by a beneficiary under the general arrangements described in Article 7 of the Regulation (the "General
Arrangements") to become a beneficiary under either of those special incentive arrangements.
369
183. What is more, the Drug Arrangements themselves do not set out any clear prerequisites —or
"objective criteria" 370—that, if met, would allow for other developing countries "that are similarly
affected by the drug problem" 371 to be included as beneficiaries under the Drug Arrangements. 372
Indeed, the European Commission's own Explanatory Memorandum notes that "the benefits of the
drug regime ... are given without any prerequisite." 373 Similarly, the Regulation offers no criteria

368The 12 designated beneficiary countries are: Boliv ia, Colombia, Costa Rica, Ecuador, El Salvador,
Guatemala, Honduras, Nicaragua, Pakistan, Panama, Peru, and Venezuela. (Regulation, Annex I (Column I))
369Regulation, Title III.
370European Communities' appellant's submission, paras. 4 and 139.
371Ibid., para. 186.
372In response to Question 4 posed by India at the First Panel Meeting, the European Communities
confirmed that the Regulation does not set out objective criteria for designating beneficiary countries under the
Drug Arrangements. The European Communities stated:
The criteria are not set out in the GSP Regulation. They are not contained in
a public document.
373Explanatory Memorandum to the Proposal for a Council Regulation applying a scheme of
generalised tariff preferences for the period 1 January 2002 to 31 December 2004, para. 35 (emphasis added)
(attached to Amended Proposal for a Council Regulation applying a scheme of generalised tariff preferences for
the period 1 January 2002 to 31 December 2004, 2001/0131 (ACC), at p. 3) (Exhibit India-7 submitted by India
to the Panel).

according to which a beneficiary could be removed specifically from the Drug Arrangements on the
basis that it is no longer "similarly affected by the drug problem". Indeed, Article 25.3 expressly
states that the evaluation of the effects of th e Drug Arrangements described in Articles 25.1(b)
and 25.2 "will be without prejudice to the conti nuation of the [Drug Arrangements] until 2004, and
their possible extension thereafter." This implie s that, even if the European Commission found that
the Drug Arrangements were having no effect whatsoever on a beneficiary's "efforts in combating
drug production and trafficking"
 374, or that a beneficiary was no longer suffering from the drug
problem, beneficiary status would continue. 375 Therefore, even if the Regulation allowed for the list
of beneficiaries under the Drug Arrangements to be modified, the Regulation itself gives no indication
as to how the beneficiaries under the Drug Arrangement s were chosen or what kind of considerations
would or could be used to determine the effect of the "drug problem" on a particular country. In
addition, we note that the Regulation does not, for instance, provide any indication as to how the
European Communities would assess whether the Drug Arrangements provide an "adequate and
proportionate response" 376 to the needs of developing countries suffering from the drug problem.
184. It is true that a country may be removed as a beneficiary under Annex I, either altogether or in
respect of certain product sectors, for reasons that are not specific to the Drug Arrangements. Thus,
Article 3 of the Regulation provides for the remova l of a country from Annex I (and hence, from the
General Arrangements and any othe r arrangements under which it is a beneficiary) if particular
circumstances are met indicating that the country has reached a certain level of development.
Article 12 provides for the removal of a country as a beneficiary under the General Arrangements and
the Drug Arrangements with respect to a product sector where the country's level of development and
competition has reached a certain threshold with respect to that sector. Neither Article 3 nor
Article 12 appears to relate in any way to the de gree to which the country is suffering from the "drug
problem". Finally, Title V to the Regulation cont ains certain "Temporary Withdrawal and Safeguard
Provisions" that are common to all the preferential arrangements under the Regulation. Although one
reason for which the arrangements may be tempor arily withdrawn is "shortcomings in customs
controls on export or transit of dr ugs (illicit substances or precursors ), or failure to comply with
international conventi ons on money laundering"
 377, this reason applies equally to the General
Arrangements, the Drug Arrangements, and the othe r special incentive arrangements. Moreover, as

374Regulation, Art. 25.1(b).
375In response to questioning at the oral hearing, the European Communities confirmed that, although
the sixth recital to the Preamble of the Regulation provides that the Drug Arrangements "should be closely
monitored", the list of beneficiaries will be unaffected by the monitoring described in Articles 25.1 and 25.2 of
the Regulation.
377Regulation, Art. 26.1(d).

the Panel appeared to recognize, this condition is not connected to the question of whether the
beneficiary is a "seriously drug-affected country".378
185. We note, moreover, that the Drug Arrangement s will be in effect until 31 December 2004. 379
Until that time, other developing countries that ar e "similarly affected by the drug problem" can be
included as beneficiaries under the Drug Arrangements only through an amendment to the Regulation.
The European Communities confirme d this understanding in response to questioning at the oral
hearing.
186. Against this background, we fail to see how the Drug Arrangements can be distinguished
from other schemes that the European Communities describes as "confined ab initio and
permanently to a limited number of developing countries". 380 As we understand it, the European
Communities' position is that such schemes would be discriminatory, whereas the Drug Arrangements
are not because "all developing countries are potentially beneficiaries" thereof.381 In seeking a waiver
from its obligations under Article I:1 of the GA TT 1994 to implement the Drug Arrangements, the
European Communities explicitly acknowledged, howe ver, that "[b]ecause the special arrangements
are only available to imports originating in [the 12 beneficiaries of the Drug Arrangements], a waiver
... appears necessary".382 This statement appears to undermine the European Communities' argument
that "all developing countries are potentially benefici aries of the Drug Arrangements" and, therefore,
that the Drug Arrangements are "non-discriminatory".383
187. We recall our conclusion that the term "non-di scriminatory" in footnote 3 of the Enabling
Clause requires that identical tariff treatment be availa ble to all similarly-situated GSP beneficiaries.
We find that the measure at issue fails to meet this requirement for the following reasons. First, as the
European Communities itself acknowledges, accord ing benefits under the Drug Arrangements to
countries other than the 12 identified beneficiaries would require an amendment to the Regulation.

378Panel Report, para. 7.216.
379Regulation, Arts. 1.1 and 41.2. We understand that the Regulation has been extended to
31 December 2005. (Council Regulation (EC) No. 2211/2003 of 15 December 2003 amending Regulation (EC)
No. 2501/2001 applying a scheme of generalised tariff preferences for the period from 1 January 2002 to 31
December 2004 and ex tending it to 31 December 2005, Official Journal of the European Union , L Series,
No. 332 (19 December 2003), p. 1)
381Ibid., para. 186.
382Council for Trade in Goods, Request for a WTO Waiver, New EC Special Tariff Arrangements to
Combat Drug Production and Trafficking, G/C/W/328, 24 October 2001, p. 2. (emphasis added)

Such a "closed list" of beneficiaries cannot ensu re that the preferences under the Drug Arrangements
are available to all GSP beneficiaries suffering from illicit drug production and trafficking.
188. Secondly, the Regulation contains no criteria or standards to provide a basis for distinguishing
beneficiaries under the Drug Arrangements from othe r GSP beneficiaries. Nor did the European
Communities point to any such criteria or standards anywhere else, despite the Panel's request to do
so.
384 As such, the European Communities cannot justify the Regulation under paragraph 2(a),
because it does not provide a basis for establishing wh ether or not a developi ng country qualifies for
preferences under the Drug Arrangements. Thus, although the European Communities claims that the
Drug Arrangements are available to all developing countries that are "similarly affected by the drug
problem" 385, because the Regulation does not define the criteria or standards that a developing
country must meet to qualify for preferences under the Drug Arrangements, there is no basis to
determine whether those criteria or standards are discriminatory or not.
189. For all these reasons, we find that the Europ ean Communities has failed to prove that the
Drug Arrangements meet the requirement in footnote 3 that they be "non-discriminatory".
Accordingly, we uphold, for different reasons, the Panel's conc lusion, in paragraph 8.1(d) of the
Panel Report, that the European Communities "faile d to demonstrate that the Drug Arrangements are
justified under paragraph 2(a) of the Enabling Clause".
VI. Findings and Conclusions
190. For the reasons set out in this Report, the Appellate Body:
(a) upholds
 the Panel's finding, in paragraph 7.53 of the Panel Report, that the Enabling
Clause is an "exception" to Article I:1 of the GATT 1994;
(b) upholds the Panel's finding, in paragraph 7.53 of the Panel Report, that the Enabling
Clause "does not exclude the applicability" of Article I:1 of the GATT 1994;
(c) modifies the Panel's finding, in paragraph 7.53 of the Panel Report, that the European
Communities "bears the burden of invoking the Enabling Clause and justifying its
Drug Arrangements" under that Clause, by finding
 that it was incumbent upon India
to raise the Enabling Clause in making its claim of inconsistency with Article I:1 of
the GATT 1994, but that the European Communities bore the burden of proving that

384See supra, footnote 372.

the Drug Arrangements satisfy the conditions of the Enabling Clause, in order to
justify those Arrangements under that Clause; and finds , further, that India
sufficiently raised paragraph 2(a) of th e Enabling Clause in making its claim of
inconsistency with Article I:1 before the Panel;
(d) need not rule on the Panel's conclusion, in para graphs 7.60 and 8.1(b) of the
Panel Report, that the Drug Arrangements ar e inconsistent with Article I:1 of the
GATT 1994;
(e) reverses the Panel's finding, in paragraphs 7.1 61 and 7.176 of the Panel Report, that
"the term 'non-discriminatory' in footnot e 3 [to paragraph 2(a) of the Enabling
Clause] requires that identi cal tariff preferences under GSP schemes be provided to
all developing countries without differentia tion, except for the implementation of a
priori limitations";
(f) reverses the Panel's finding, in paragraph 7.17 4 of the Panel Report, that "the term
'developing countries' in paragraph 2(a) [of the Enabling Clause] should be
interpreted to mean 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
(g) upholds, for different reasons, the Panel's conclu sion, in paragraph 8.1(d) of the Panel
Report, that the European Communities "failed to demonstrate that the Drug
Arrangements are justified under paragraph 2(a) of the Enabling Clause".
191. The Appellate Body therefore recommends that the Dispute Settlement Body request the
European Communities to bring Council Regulation (EC) No. 2501/2001, found in this Report, and in
the Panel Report as modified by this Report, to be inconsistent with Article I:1 of the GATT 1994 and
not justified under paragraph 2(a) of the Enabling Cl ause, into conformity with its obligations under
the GATT 1994.

Signed in the original at Geneva this 18th day of March 2004 by:

Georges Abi-Saab
Presiding Member

 _________________________ _________________________
 Luiz Olavo Baptista Giorgio Sacerdoti
 Member Member

ANNEX 1

8 January 2004
 (04-0070)
 Original: English

Notification of an Appeal by the European Communities
under paragraph 4 of Article 16 of the Understanding on Rules
and Procedures Governing the Settlement of Disputes ("DSU")

 The following notification, dated 8 January 2004, from the Permanent Delegation of the
European Commission, is being circulated to Members.

 Pursuant to Article 16 of the Understanding on Rules and Procedures Governing the
Settlement of Disputes ("DSU") and Rule 20 of the Working Procedures for Appellate Review, the
European Communities hereby notifies its decision to appeal to the Appellate Body certain issues of
law covered in the report of the pa nel established in response to the request from India in the dispute
European Communities – Conditions for the Granti ng of Tariff Preferences to Developing Countries
(WT/DS246R).

 The European Communities seeks review of th e Panel's legal conclusion that the Special
Arrangements to Combat Drug Production and Tra fficking provided in Council Regulation (EC)
No. 2501/2001 (the "Drug Arrangements") are inconsistent with Article I:1 of the General Agreement
on Tariff and Trade 1994 (the "GATT"). This conclusion is based on the following erroneous legal
findings:

- that the Enabling Clause is an "excep tion" to Article I:1 of the GATT;

- that the Enabling Clause does not exclude the applicability of Article I:1 of the GATT;

- that the EC had the burden of proving that the Drug Arrangements were consistent with the
Enabling Clause.

 The above legal conclusion, and the related legal findings and interpretations are set out in
paragraphs 7.31 to 7.60 and 8.1 (b) and (c) of the Panel report.

 India did not make any claims under the Enab ling Clause and, therefore, the Appellate Body
should refrain from examining the consistency of the Drug Arrangeme nts with the Enabling Clause.
However, if the Appellate Body were to uphold the Panel's conclusion that the Drug Arrangements
are inconsistent with Article I:1 of the GATT, or if the Appellate Body were to decide that India made
a valid claim under the Enabling Clause, the Europ ean Communities appeals subsidiarily the Panel's

legal conclusion that the European Communities "f ailed to demonstrate that the Drug Arrangements
are justified under paragraph 2(a) of the Enabling Clause". That conclusion is based on the following
erroneous legal findings:

- that "the term "non-discriminatory" in footnot e 3 to Paragraph 2(a) requires that identical
tariff preferences under GSP schemes be provi ded to all developing countries without
differentiation, except for the implementation of a priori limitations"; and

- that the term "developing countries" in Paragraph 2(a) means all developing countries.

 This legal conclusion and th e related legal findings and interpretations are set out in
paragraphs 7.61-7.177 and 8.1(d) of the Panel report.

 Finally the EC seeks review of the Panel's legal conclusion that the European Communities
has nullified or impaired benefits accrued to India under GATT 1994, which is set out in
paragraph 8.1(f) of the Panel report

ANNEX 2

DIFFERENTIAL AND MORE FAVOURABLE TREATMENT
RECIPROCITY AND FULLER PARTICIPATION
OF DEVELOPING COUNTRIES

Decision of 28 November 1979
(L/4903)

 Following negotiations within the framework of the Multilateral Trade Negotiations, the
CONTRACTING PARTIES decide as follows:

1. Notwithstanding the provisions of Article I of the General Agreement, contracting parties
may accord differential and more favourab le treatment to developing 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 developing countries in acco rdance 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 me asures governed by the provisions of
instruments multilaterally negotiated under the auspices of the GATT;

 ( c) Regional or global arrangements entere d into amongst less-developed contracting
parties for the mutual reduction or elimination of tariffs and, in accordance 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 develo ped 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 promot e the trade of developing countries and not
to raise barriers to or create undue difficu lties for the trade of any other contracting
parties;

 ( b) shall not constitute an impediment to the reduction or elimination of tariffs and other
restrictions to trade on a most-favoured-nation basis;

1 The words "developing countries" as used in this text are to be understood to refer also to developing
territories.
2 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 As described in the Decision of the CONTRACTING PARTIES of 25 June 1971, relating to the
establishment of "generalized, non-reci procal and non discriminatory preferences beneficial to the developing
countries" (BISD 18S/24).

 ( 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. Any contracting party taking action to introdu ce an arrangement pursuant to paragraphs 1, 2
and 3 above or subsequently taki ng action to introduce modification or withdrawal of the differential
and more favourable treatment so provided shall:
4

 (a) notify the CONTRACTING PARTIES and furnish them with all the information they
may deem appropriate relating to such action;

 ( b) afford adequate opportunity for prompt cons ultations at the request of any interested
contracting party with respect to any di fficulty or matter that may arise. The
CONTRACTING PARTIES shall, if requested to do so by such contracting party,
consult with all contracting parties concerne d with respect to the matter with a view
to reaching solutions satisfactory to all such contracting parties.

5. The developed countries do not expect recipr ocity for commitments made by them in trade
negotiations to reduce or remove tariffs and other barriers to the trade of developing countries, i.e., the
developed countries do not expect the developing c ountries, in the course of trade negotiations, to
make contributions which are inconsistent with th eir individual development, financial and trade
needs. Developed contracting parties shall therefor e not seek, neither shall l ess-developed contracting
parties be required to make, concessions that are inc onsistent with the latters ' development, financial
and trade needs.

6. Having regard to the special economic difficu lties and the particular development, financial
and trade needs of the least-developed countries, the developed countries shall exercise the utmost
restraint in seeking any concessions or contributions for commitments made by them to reduce or
remove tariffs and other barriers to the trade of su ch countries, and the least-developed countries shall
not be expected to make concessions or contributi ons that are inconsistent with the recognition of
their particular situation and problems.

7. The concessions and contribu tions made and the obligations assumed by developed and less-
developed contracting parties under the provisions of the General Agreement should promote the
basic objectives of the Agreement, including those embodied in the Preamble and in Article XXXVI.
Less-developed contracting parties expect that th eir capacity to make contributions or negotiated
concessions or take other mutually agreed action under the provisi ons and procedures of the General
Agreement would improve with the progressive deve lopment of their economies and improvement in
their trade situation and they would accordingly expect to participate more fully in the framework of
rights and obligations under the General Agreement.

8. Particular account shall be taken of the seri ous difficulty of the least-developed countries in
making concessions and contributions in view of their special economic situation and their
development, financial and trade needs.

9. The contracting parties will collaborate in a rrangements for review of the operation of these
provisions, bearing in mind the need for individual and joint efforts by contracting parties to meet the
development needs of developing countries and the objectives of the General Agreement.

4 Nothing in these provisions shall affect the rights of contracting parties under the General
Agreement.