Issue Number 23: 18th December 2015

Season’s Greetings

2015 is drawing to a close and all of us in the International Trade and Food Law Group of FratiniVergano would like to wish you, your colleagues and families all the best for a peaceful holiday season and for a successful and healthy 2016. We hope that you have enjoyed Trade Perspectives^© throughout this year and that you have always found it stimulating and timely. As usual, we have published a total of 23 issues and invested a great deal of time and energy in this undertaking. We have done it with the usual passion and drive. You can find all previous issues of Trade Perspectives^© on our website (/en/trade-perspectives/).

For the year to come, we plan on continuing our editorial efforts and to entertain an even closer dialogue with our readers, beginning with the publication of the next issue of Trade Perspectives^© on 15 January 2016. Trade Perspectives^© is now circulated to over 4,500 recipients worldwide and not a single week goes by without new readers asking to be added to our circulation list. This fills us with pride, but also with a deep sense of commitment and discipline towards our readers’ expectations. Thank you for your interest in our publication and for helping us to make it a better and more useful tool of discussion. We look forward to continue hearing from you regularly and to another year of exciting international trade and food law developments.

WTO Members conclude the Tenth WTO Ministerial Conference
The US files a request for WTO consultations in China – Tax Measures Concerning Certain Domestically Produced Aircraft
An EU Commission report suggests setting legal limits on trans fats
Recently Adopted EU Legislation

WTO Members conclude the Tenth WTO Ministerial Conference

On 19 December 2015, WTO Members concluded the Tenth WTO Ministerial Conference in Nairobi, Kenya, reaching a deal on a number of trade issues. The so-called ‘Nairobi Package’ was agreed upon after five days of negotiations and includes a number of important commitments on agricultural trade, as well as decisions in favour of Least-Developed Countries (hereinafter, LDCs). The package also formalises the conclusion of plurilateral negotiations among 53 WTO Members to expand the product coverage of the Information Technology Agreement (hereinafter, ITA). Although the Nairobi Package represents a moment of relative success for WTO Members, it is also apparent that there are disagreements among the WTO Membership regarding the best ways to address trade liberalisation in the future.

In particular, the Nairobi Package includes six major Ministerial Decisions: three Ministerial Decisions on agriculture (i.e., Special Safeguard Mechanism for Developing Country Members; Public Stockholding for Food Security Purposes; and Export Competition), a Ministerial Decision on Cotton; and two Ministerial Decisions on issues related to LDCs (i.e., Preferential Rules of Origin for Least-Developed Countries; and Implementation of Preferential Treatment in Favour of Services and Service Suppliers of Least Developed Countries and Increasing LDC Participation in Services Trade).

With respect to agriculture, a landmark achievement is the Ministerial Decision on Export Competition, which addresses export subsidies and other export competition issues. Export subsidies are considered particularly trade-distorting and are already prohibited for manufactured goods under the Agreement on Subsidies and Countervailing Measures (hereinafter, SCM Agreement). The Agreement on Agriculture, concluded as part of the Uruguay Round and in force since 1 January 1995, subjected WTO Members to reduction commitments for export support, expressed in terms of both the volume of subsidised exports and the budgetary outlays for these subsidies, allowing their use only within such committed levels. In the 2005 Hong Kong Ministerial Declaration, WTO Members affirmed their commitment the parallel elimination of all forms of export subsidies and disciplines on all export measures with equivalent effect by 2013, but such an objective was not possible at the Ninth WTO Ministerial Conference in 2013. Instead, as part of the 2013 Bali Ministerial Declaration, WTO Members affirmed their commitment to exercise utmost restraint with regard to any recourse to all forms of export subsidies and all export measures with equivalent effect. Under the Ministerial Decision on Export Competition, as part of the Nairobi Package, developed WTO Members have agreed to immediately eliminate their remaining scheduled export subsidies. This commitment includes an exception that allows developed countries to subsidise the exportation of processed products, dairy products and swine meat until 2020, provided, inter alia, that such products are not exported to LDCs. Developing countries are required to eliminate export subsidies by the end of 2018, with an exception until 2022 for products or groups of products for which the developing country concerned has notified its support to the Committee on Agriculture. Developing countries may also continue to use export subsidies for transport and marketing purposes (covered in Article 9.4 of the Agreement on Agriculture) until 2023 (i.e., five years after the end-date for elimination of all forms of export subsidies). LDCs and eligible net food importing developing countries will be allowed to do so until 2030. Specific disciplines concern cotton: with regard to this commodity, the Ministerial Decision on Export Competition requires that export subsidies be immediately removed by developed countries, and, by 1 January 2017, by developing countries.

The Ministerial Decision on Export Competition contains a set of disciplines to ensure that other export policies not be used as disguised subsidies. These disciplines include terms and conditions to limit the benefits of “export financing support” (i.e., a concept that includes certain types of export credits, export credit guarantees and insurance programmes) to agriculture exporters (e.g., the maximum repayment term for export financing support is set at 18 months for developed countries and longer periods for developing countries), disciplines to ensure that food aid does not negatively affect domestic production, and rules on agricultural exporting state trading enterprises. In relation to this latter issue, in relevant part, the decision provides a definition of “agricultural exporting state trading enterprise” based on the working definition provided for in the Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and Trade 1994 (hereinafter, GATT) (i.e., “Governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports”), and requires that WTO Members make their “best efforts” to ensure that the use of export monopoly powers by agricultural exporting state trading enterprises are exercised in a manner that “minimises trade distorting effects and does not result in displacing or impeding the exports of another [WTO] Member”.

With respect to LDCs, the Nairobi Package includes a Ministerial Decision on Preferential Rules of Origin for Least-Developed Countries and a Ministerial Decision on Implementation of Preferential Treatment in Favour of Services and Service Suppliers of Least Developed Countries and Increasing LDC Participation in Services Trade. The former Ministerial Decision includes new considerations regarding the assessment of sufficient or substantial transformation, cumulation, documentary requirements, implementation, flexibilities and transparency by certain ‘preference-granting’ WTO Members, including allowing use of non-originating materials in up to 75% of the final value of products, when imported from LDCs. The latter Ministerial Decision extends a previous Decision on Preferential Treatment to Services and Service Suppliers of Least-Developed Countries (i.e., waiver) until 31 December 2030. Said Ministerial Decisions should continue to aid LDCs to improve their economic situations, especially in sub-Saharan Africa, where a majority of LDCs are located.

The Nairobi Package also includes the Ministerial Declaration on the Expansion of Trade in Information Technology Products (hereinafter, Ministerial Declaration on the ITA II). The ITA entered into force on 1 July 1997 and requires its participants to “meet periodically” in order to review the product coverage (for more information, see Trade Perspectives, Issue No. 9 of 3 May 2013 and Issue No. 21 of 14 November 2014). Negotiations of the so-called ITA II proved difficult to advance and stalled at the end of 1998. In 2012, the US proposed to re-launch the ITA II negotiations by expanding the product list, and advancing the elimination of non-tariff barriers. The proposal was welcomed and supported by major ITA participants, inter alia, Australia, Canada, the EU, Japan and New Zealand. The ITA II, as endorsed by the Ministers of 53 WTO Members, requires signatories to eliminate customs duties on the agreed information technology products in equal rate reductions on the following dates: 1 July 2016; 1 July 2017; 1 July 2018; and 1 July 2019. The Ministerial Declaration on the ITA II also requires participants to eliminate other duties and charges of any kind, within the meaning of Article II:1(b) of the GATT, by 1 July 2016. The negotiated ITA II includes a ‘critical mass’ clause, which requires the participants to implement the reductions of customs duties, and other duties and charges, once the product schedules represent approximately 90% of world trade in the covered products. However, the Ministerial Declaration on the ITA II acknowledges that such a ‘critical mass’ (i.e., 90% of world trade in the relevant products) is already present, and thus the relevant reductions should be immediately implemented as described above. The completion of the ITA II has generally been considered as an important success, given that the implementation of the duties and charges related to the expanded product list is estimated to reduce import tariffs by USD 1.3 trillion around the world.

The Tenth WTO Ministerial Conference also resulted is more minor, although still important Decisions regarding the Work Programme on Electronic Commerce; TRIPs non-violation and situation complaints; and the Work Programme on Small Economies. Although many commentators appear to agree that the Tenth WTO Ministerial Conference was in large part a success, mostly due to the agreement regarding agricultural export subsidies, WTO Members acknowledged that there are profound internal disagreements regarding whether or not the Doha Development Agenda (i.e., the current multilateral negotiating round) is the proper conduit to advancing trade at the multilateral level. Quite revealingly, in the days leading up to the Tenth WTO Ministerial Conference, Michael Froman, US Trade Representative, published a piece in the Financial Times calling for the end of the ‘Doha Round’ and the development of a new approach to trade liberalisation. Although the WTO arguably remains the most important forum regarding international trade regulation, interested parties should closely monitor developments as WTO Members consider new approaches to addressing trade issues and international trade liberalisation.

The US files a request for WTO consultations in China – Tax Measures Concerning Certain Domestically Produced Aircraft

On 8 December 2015, the US filed a request for WTO consultations with China regarding tax measures applicable to certain aircraft. If the dispute, titled China – Tax Measures Concerning Certain Domestically Produced Aircraft, were to progress to the panel stage, it could provide an interesting addition to the WTO jurisprudence that stemmed from previous disputes in the aviation sector.

In its request for WTO consultations, the US points to four legal instruments from the Chinese authorities that reflect the measures at issue in the dispute. At issue are Chinese tax policies, in particular a value-added tax (hereinafter, VAT) that the US claims is applied to certain imported aircraft, but not to the ‘like’ domestically-produced aircraft. A press release circulated by the US Trade Representative (hereinafter, USTR) expands upon the facts, stating that the tax policy at issue is a 17% VAT applied to imported aircraft generally under 25 metric tonnes by weight. Domestically-produced aircraft, which are subject to the VAT exemption, range from general aviation aircraft, including propeller-driven general aviation aircraft and business jets, to certain agricultural aircrafts. Notably, the exemption applies to the ARJ21 made by the Commercial Aircraft Corporation of China (known as Comac), the first commercial regional jet produced in China. The USTR suggests that the Chinese measures negatively affect US companies producing ‘like’ products throughout the aviation sector supply chain, including US producers of aircraft looking to export directly to China, and aircraft component producers whose products are incorporated into aircraft produced in the US or third countries for sale in China. In the US, direct competitors to Comac and other Chinese aircraft companies in the sub-25 tonne aircraft market include Gulfstream, Cessna and Cirrus. However, as noted above, US companies also produce parts for third country manufacturers in the sub-25 tonne aircraft market, including Embraer from Brazil and Bombardier from Canada.

The legal claims put forward by the US focus on China’s lack of transparency regarding the measures at issue, as well as on the alleged discrimination against foreign products. With respect to transparency, the US cites Article X:1 of the GATT, which requires WTO Members to publish promptly any laws, regulations, judicial decisions and administrative rulings of general application in such a manner as to enable governments and traders to become acquainted with them. The US also cites various transparency obligations in the Protocol on the Accession of the People’s Republic of China, which China agreed to implement as part of its accession to the WTO in 2001. With regards to discrimination against foreign products, the US cites Article III:2 and Article III:4 of the GATT. According to Article III:2 of the GATT, WTO Members may not impose, directly or indirectly, internal taxes or other internal charges of any kind to products imported from other WTO Members in excess of those applied, directly or indirectly, to ‘like’ domestic products. Article III:4 of the GATT states that products imported into the territory of a WTO Member must be accorded treatment no less favourable than that accorded to ‘like’ products of national origin (known as the principle of ‘National Treatment’). The reliance by the US on Article III of the GATT is interesting. Although previous WTO disputes relating to the aviation sector have cited Article III of the GATT, the decisions of the panels and the Appellate Body have been based on the WTO SCM Agreement.

For example, in EC – Large Civil Aircraft and US – Large Civil Aircraft, which dealt with subsidies provided to Airbus and Boeing, respectively, the EU and the US argued that each other’s measures constituted actionable subsidies under Article 5 and Article 6 of the SCM Agreement. Under the SCM Agreement, claims must be against a ‘specific subsidy’, which means a financial contribution by a government or any public body, or any form of income or price support, where a benefit is thereby conferred and which is specific to an enterprise or industry or group of enterprises or industries. With respect to the dispute at hand, one type of relevant ‘financial contribution’ under the SCM Agreement is “government revenue that is otherwise due is foregone or not collected”, which generally includes tax policies that provide for certain exemptions. Under Article 5 of the SCM Agreement, once a specific subsidy is found to exist within the meaning of Article 1 and 2 of the SCM Agreement, such subsidy is actionable if it causes adverse effects on another WTO Member. Under the SCM Agreement, adverse effects are present when there is: (a) injury to the domestic industry of another WTO Member; (b) nullification or impairment of benefits accruing directly or indirectly to other WTO Members; or (c) serious prejudice to the interests of another WTO Member. A detailed explanation of the term ‘serious prejudice’ is provided in Article 6 of the SCM Agreement. Given the claims by the US that China’s measures have affected domestic US industry throughout the aviation sector, it is interesting that its request for WTO consultations with China on this matter did not cite the SCM Agreement. It may be, given the apparent issues regarding transparency of China’s measures, that the US will bring claims under the SCM Agreement if it is able to gather more evidence. In accordance with the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (i.e., DSU), the US would need to do so in its request for the establishment of a WTO panel and in consultation with the Chairman of the WTO Dispute Settlement Body, should the dispute progress to that stage, or it would be barred from bringing those claims during later stages of litigation.

The choice of bringing claims under Article III of the GATT as opposed to various provisions in the SCM Agreement is also interesting due to the applicable analyses for ‘like’ products and the relevant ‘market’, respectively. WTO jurisprudence, including EC – Asbestos and Japan – Alcoholic Beverages II, indicates that the ‘like products’ tests differ under Article III:2 and Article III:4 of the GATT (i.e., the ‘like products’ test under Article III:2 is more narrow in scope). Nonetheless, under both provisions, specific ‘like products’ from both WTO Members would need to be identified. In addition, when compared to the need to identify the relevant market under Article 5 and Article 6 of the SCM Agreement, the comparable market under the SCM Agreement is arguably larger. For example, in US – Large Civil Aircraft, the parties (i.e., the EU and the US) agreed that the market for large civil aircraft (hereinafter, LCA) is, geographically speaking, the entire global market. The US and the panel accepted the EU’s definition of the global market, which it presented as five market segments divided on the basis of flight range and seating capacity. Those market segments included single-aisle aircraft with 100-200 seats, wide body aircraft with 200-300, 300-400 and 400-500 seats, and super wide-body aircraft with more than 500 seats. Although the US did not completely agree with the EU’s categorisation of market segments, it did agree that the claimant should be allowed to present a reasonable definition of the market for use in its claims. In the dispute at hand, the US appears to define the market at issue as the sub-25 tonne aircraft market generally, but will likely divide the market further if the dispute progresses. This may be particularly necessary if the US continues to limit its claims to Article III of the GATT as opposed to the relevant provisions of the SCM Agreement.

Although the dispute deals with the smaller-body aircraft industry, as opposed to the wider-body aircraft industry that is dominated by Airbus and Boeing, its outcome may be relevant to the aviation sector as a whole. It is estimated that the general aviation aircraft sector in China will grow by 19% per year through 2020, making the Chinese aviation sector one of the fastest growing in the world. China has entered the aircraft industry with Comac, and although the Comac ARJ21, which serves as one of the relevant products to this dispute, does not compete with Airbus and Boeing, Comac will soon release its C919, a 150-plus seat narrow-body aircraft that will compete with Airbus and Boeing products. Interested parties should continue to monitor the dispute and the potential effects that it may have on the global aviation sector.

**An EU Commission report suggests setting legal limits on trans fats**

On 3 December 2015, the EU Commission adopted a report to the European Parliament and the Council on trans fats in food and in the overall diet of the EU population. The aim of said report is to assess the impact of appropriate means that could enable consumers to make healthier food and overall dietary choices or that could promote the provision of healthier food options to consumers. Such appropriate means include, inter alia, the provision of information on trans fats to consumers or restrictions on their use. Article 30(7) of Regulation (EU) No. 1169/2011 on the provision of food information to consumers (hereinafter, the FIR) required the EU Commission to submit the report by 13 December 2014 and, if appropriate, to have it accompanied with a legislative proposal (see Trade Perspectives, Issue No. 7 of 2 April 2015 and Issue No. 10 of 15 May 2015). The delayed report (which refers to a ‘preliminary’ assessment and analysis) is not yet accompanied with such a legislative proposal.

Trans fats or trans fatty acids (hereinafter, TFAs) are a particular type of unsaturated fatty acid. In the FIR, they are defined as “fatty acids with at least one non-conjugated (namely interrupted by at least one methylene group) carbon-carbon double bond in the trans configuration”. TFAs are naturally present in food products made from ruminant animals such as dairy and meat from cattle, sheep or goat (i.e., naturally occurring ruminant TFAs or rTFAs), but can also be produced industrially (TFAs of industrial origin or iTFAs). Partially hydrogenated vegetable oils (hereinafter, PHVOs) are the primary dietary source of iTFAs. PHVOs are used in food products such as margarines, shortenings and bakery products. Consumption of TFAs is associated with an increased risk of coronary heart disease. Indeed, the latest scientific opinion on TFAs by the European Food Safety Authority (EFSA) in 2010 states that “TFA intakes should be as low as is possible within the context of a nutritionally adequate diet”.

A number of EU Member States (i.e., Austria, Denmark and Hungary) and other European countries (i.e., Iceland and Switzerland) have already adopted limitations on TFAs in food. The result of voluntary reformulation from manufacturers is that most food in the EU already has less than 2% of TFAs’ fat per 100g of fat, but this varies widely from country to country. High levels of TFAs have been found in Bulgaria, Croatia, Poland, Slovenia and Sweden, as well as candidate countries (i.e., Serbia, Montenegro and the former Yugoslav Republic of Macedonia and the potential candidate country Bosnia-Hercegovina). The EU Commission’s report suggests that little progress has been made in certain parts of the EU and that for certain foods, such as popcorn and biscuits, up to 50% of the fat content is TFAs. In some Eastern and South-Eastern European countries, iTFAs’ levels in pre-packaged biscuits, cakes and wafers have not dropped meaningfully since the mid-2000s. Although the average intake in the EU is below recommended levels, this cannot be said for all groups of population.

The EU Commission’s report outlines possible approaches to limiting TFAs’ levels in food and population intakes, that can broadly be divided into legislative actions on the one hand and voluntary measures on the other. Legislative measures may be TFAs’ limits in foodstuffs (either at the ingredient level or in the final product) or the mandatory TFAs’ content information in the nutrition declaration. Voluntary reformulation or – where allowed – the voluntary inclusion of TFAs’ content in the nutrition declaration, which is currently legally not possible in the EU under the FIR, leave it to the food business operators (hereinafter, FBOs) to decide whether or not to reformulate products or inform consumers about TFAs. Furthermore, governments may issue dietary recommendations on maximum TFAs’ intakes and relevant food sources of TFAs. The report notes that the available evidence indicates that all existing TFAs’ reduction strategies appear to be associated with significant reductions in TFAs’ levels in food. In particular, national and local prohibitions were most effective at eliminating TFAs from the food supply, whereas mandatory TFAs’ labelling and voluntary TFAs’ limits had a varying degree of success, which largely depended on the category of food.

Therefore, the EU Commission’s report suggests that setting a legal limit for iTFAs’ content would be the most effective measure in terms of public health, consumer protection and compatibility with the single market. The report states that “consumers would be systematically provided with healthier food options without needing to distinguish products with lower TFA levels. Potential public health benefits would be the highest for this option as all products would be covered and all population groups would benefit from TFA reductions, including the more vulnerable groups”. However, the EU Commission states that the way in which such legal limits could be technically put into practice would require further investigation. The report notes that there are food products with high iTFAs’ content available on the EU market and that there are public health gains to be reaped by reducing their intake. A limit could also benefit trade: “Should no action be taken at EU level, difficulties might also arise for EU producers who are interested in access to the US market”, the report says. In fact, in June 2015, the US Food and Drug Administration (FDA) revoked the GRAS (i.e., Generally Recognised As Safe) status of PHVOs, and FBOs were given three years to remove them from their products.

Policy options other than a legal limit on TFAs were not disregarded by the EU Commission and the ‘preliminary’ nature of the EU Commission’s assessment leaves arguably all doors open to discussion. In relation to voluntary reformulation of foods by FBOs to reduce iTFAs’ content, the full profile of the reformulated product has to be considered in order to ensure that healthier food options are provided after reformulation. For example, concerns have been expressed that reformulation to reduce TFAs may lead to increased saturated fatty acids content. However, the replacement with saturated fatty acids still entails significant public health benefits (leading to an estimated 17% risk reduction for heart disease). Studies show that, while in some products TFAs have indeed been replaced by saturated fatty acids, in the majority of cases, there have been no major differences in the saturated fatty acids content, that the sum of TFAs and saturated fatty acids content was reduced in most cases, and that reformulated products have increased the content of cis-unsaturated fats and have an overall healthier profile. However, it must be admitted that voluntary reformulation and ‘self-regulation’ could put domestic FBOs at a disadvantage as they compete with cheaper imported products containing TFAs.

The policy option of mandatory labelling could, in theory, incentivise reformulation and allow consumers to make healthier choices. Although current consumer awareness regarding the difference between PHVOs and fully hydrogenated oils (containing no TFAs) is low, this option would simply increase the complexity of decision-making for consumers, while the industry would feel under no pressure to reduce levels. In fact, the FIR does not require a specific reference to TFAs, nor does it regulate the content of TFAs in foodstuffs. The FIR requires, in No. 8 of Part A of Annex VII, that the expression “fully hydrogenated” or “partly hydrogenated”, as appropriate, accompany the indication of hydrogenated fats and oils in the list of ingredients on food products. Therefore, knowledgeable consumers that are aware that PHVOs contain TFAs can already identify, by carefully reading the list of ingredients, whether a product contains TFAs (although not in what amount).

The Codex Alimentarius Guidelines on Nutrition Labelling establish an interesting option not addressed in the report. The guidelines state that “[c]ountries where the level of intake of trans-fatty acids is a public health concern should consider the declaration of trans-fatty acids in nutrition labelling”. Perhaps such a system could also be an option for the EU, where there are significant differences from country to country. For example, FBOs in the UK virtually eliminated iTFAs in packaged foods years ago. The UK industry has voiced that it does not oppose the introduction of legal limits for iTFAs, but that it questions the logic of implementing and policing legislative limits in the UK to tackle a problem that has already been successfully resolved through voluntary measures. However, would this matter qualify for a multi-speed Europe or two-speed Europe (i.e., the idea that different parts of the EU should integrate at different levels and pace depending on the situation in each individual country)? It appears that, with a limit on TFAs already in place in some EU Member States, and others expressing their intention to implement a limit, the EU market is at risk of becoming increasingly fragmented, which would be an argument for EU harmonisation.

The EU Commission will shortly launch a public consultation and carry out an impact assessment to collect more information and build on the preliminary analysis provided by the report. This process will inform the EU Commission’s policy decision in the near future. The next steps taken in the EU on TFAs and HFSS foods should be monitored and operators should be prepared to participate in shaping upcoming EU legislation by interacting with EU Institutions, third country Governments, relevant trade associations and affected stakeholders.