Philippines’ WTO win on cigarettes

is the subject of my Trade Tripper column in this Friday-Saturday issue of BusinessWorld:

The country finally got good news in the international front when the WTO’s Appellate Body released last June 17, 2011, its report on Thailand -- Customs and Fiscal Measures on Cigarettes from the Philippines (docketed as DS371). The dispute is quite important considering that the livelihood of thousands of Filipino farmers was at stake. It should also quiet local critics of the WTO: say what they will, it cannot be denied that without the WTO’s highly efficient dispute settlement system, the country would not have been able to protect its interests as well as it did.

The case had to do with Thai taxes imposed on imported cigarettes, with Philippine total exports of our cigarettes significantly declining for the two years prior to the filing of the complaint. The dispute, as a whole, covers the areas of customs valuation, excise taxes, health and TV tax, VAT, and dual licensing requirements. Specifically, it involves the provisions of the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU"), the General Agreement on Tariffs and Trade 1994 (the "GATT 1994," which is actually GATT 1947), and the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (the "Customs Valuation Agreement"). The main cause of action of the Philippine complaint is whether Thailand is violating WTO national treatment provisions.

The WTO panel released its report last Nov. 15, 2010 (a copy of the 426 page report can be viewed at http://www.wto.org/english/tratop_e/dispu_e/371r_e.pdf). The WTO panel found that the Thais acted inconsistently with the provisions of Articles 1.1, 1.2, 1.2(a), 7.1, 7.3, 10, and 16 of the Customs Valuation Agreement; and Articles III.2 and III.4, as well as X.1, X.3(a), and X.3(b) of the GATT. The panel found also that "Thailand does not maintain or apply a general rule requiring the rejection of the transaction value and the use of the deductive valuation method."

On promptly appealing to the AB, Thailand focused on the panel’s findings under Article III:2, Article III:4, and Article X:3(b) of the GATT 1994. With its report, the AB essentially upheld all of the panel’s key findings and, thusly, an overwhelming victory for the Philippines. A copy of the AB report can be found in http://www.worldtradelaw.net/reports/wtoab/thailand-cigarettesphilippines(ab).pdf. The report, in conclusion, pointedly found:

"223. For the reasons set out in this Report, the Appellate Body:

"(a) with respect to the Panel’s findings under Article III of the GATT 1994 concerning Thailand’s treatment of resellers of imported cigarettes, as compared to its treatment of resellers of like domestic cigarettes:

"(i) upholds the Panel’s finding, in paragraph 8.3(b) of the Panel Report, that Thailand acts inconsistently with Article III:2, first sentence, of the GATT 1994 by subjecting imported cigarettes to VAT liability in excess of that applied to like domestic cigarettes;

(ii) with respect to the Panel’s findings under Article III:4 of the GATT 1994:

"- finds that the Panel did not err in concluding, in paragraph 7.738 of the Panel Report, that Thailand accords less favourable treatment to imported cigarettes than to like domestic cigarettes; xxx and

"(b) upholds the Panel’s finding, in paragraph 8.4(g) of the Panel Report, that Thailand acts inconsistently with Article X:3(b) of the GATT 1994.

"224. The Appellate Body recommends that the DSB request Thailand to bring its measures, found in this Report, and in the Panel Report as modified by this Report, to be inconsistent with the Agreement on Customs Valuation and the GATT 1994, into conformity with its obligations under those Agreements."

This is a good win for the country. It also clearly demonstrated how important it is for local industry to cooperate and work well with (rather than antagonize or take a suspicious stance vis-a-vis) our trade officials in handling disputes. In this case, the supportive attitude and competence of Philip Morris is to be commended. For Filipino lawyers, it also represents the first time the country won in an international dispute at the state-to-state level (the ICSID case involving the NAIA3 contract was on a state-to-private company level dispute). Prior to DS371, the Philippines had won none of its eight previous cases at the WTO (none also for the International Court of Justice). So I hope I be permitted in saying that, alongside trade officials Tom Aquino and Tong Buencamino and lawyers Dondi Teehankee and JV Chan-Gonzaga, I’m quite happy to at least have a small participation in this case as then legal adviser to the Philippines.

I’ll devote a future article to parse through some of the more interesting analysis and findings of the AB, as well as consequences moving forward. For the moment, a win is a win. It would be interesting to see how the other WTO case (DS396 and DS403) turns out, this time involving the EC’s and the US’ complaint that Philippine excise taxes on distilled liquor discriminate against imported whiskey. Hopefully, aside from the smokes, a victory drink would be forthcoming as well.