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Guest Post: A cloud over Clove cigarettes

[The following is a guest post by Jayant Raghu Ram, an alumnus of National Law University, Jodhpur. He is currently working as a Research Fellow with the Centre for WTO Studies in the Indian Institute of Foreign Trade.]

The recent case of US-Clove Cigarettes is making a fresh comeback in the news. The decision of the WTO Appellate Body in April 2012 went in favour of the complainant, Indonesia, concluding that the US Tobacco Control Act of 2009 is discriminatory in nature as it prohibits circulation of clove cigarettes from abroad while still permitting the sale of similar domestically-manufactured products, particularly menthol cigarettes. Having the status of the world’s largest manufacturer of clove cigarettes, the Southeast Asian country naturally suffered huge losses due to the US ban. Reports indicate that Indonesian producers had shipped more than 90 percent of the US’ clove cigarettes with annual exports potentially worth up to US$200 million.

Following the final verdict by the WTO adjudicating bodies there was disagreement between the US and Indonesia over compliance, and the matter was referred to arbitration. Unsatisfied with the efforts of the US administration and worried about the continuing damage to its domestic industry, Indonesia had requested the WTO to allow it to impose sanctions against the Western superpower to the tune of US$50.5 million.

110903 Indonesia Fails to Convince WTO on U.S. Clove-Cigarette Ban

The latest twist in the tale has come, very surprisingly, from the side of European Union. The EU has confronted Indonesia in a two-pronged manner. First, it considers that Indonesia acted inconsistently with the Dispute Settlement Body (DSB) procedure by unilaterally requesting sanctions against the US without first requesting the establishment of a “compliance panel” to consider whether the measures undertaken by the US government were sufficient. Second, the EU has taken issue with the fact that Indonesia had rejected the participation of the EU as a third party at the compliance/arbitration panel proceedings which it maintains has prevented the interests of the bloc from being adequately considered.

As Simon Lester points out in his blog, the move has dumbfounded many a trade expert. The WTO website reports:

“Both issues, the “sequencing” problem (the possibility of applying sanctions without waiting for the results of a compliance panel) and the participation of third parties at compliance/arbitration procedures, have been a subject of systemic concern by WTO members for a long time and are part of the current negotiations to improve the Dispute Settlement Understanding.”

As I understand it, according to the EU, Indonesia should have resorted to Art. 21.5 before going the retaliation route. While the EU is indeed raising a systemic issue that is currently being negotiated at the DSU review, my question is much more elemental and basic: what legal basis does the EU have to challenge another Member’s DSU procedure? In other words, what locus does the EU have in this case? I am not sure the EU has any case at all here and wonder what the consultations are going to be about.

Art. 1.1 of the DSU has to be accessed at this point of time to provide some clarity:

“The rules and procedures of this Understanding shall apply to disputes brought pursuant to the consultation and dispute settlement provisions of the agreements listed in Appendix 1 to this Understanding (referred to in this Understanding as the “covered agreements”).The rules and procedures of this Understanding shall also apply to consultations and the settlement of disputes between Members concerning their rights and obligations under the provisions of the Agreement Establishing the World Trade Organization (referred to in this Understanding as the “WTO Agreement”) and of this Understanding taken in isolation or in combination with any other covered agreement.”

What I understand from this is that the DSU applies to disputes concerning each Member’s rights and obligations. I’m absolutely unable to see on what basis the EU can bring about a complaint under the DSU against Indonesia. According to me, the EU doesn’t have a “right” against Indonesia; nor does Indonesia have an “obligations” towards the EU in respect of the DSU procedures. Looking forward to having a discussion regarding the same.

[Picture source]

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