Smoking out Thai cigs

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

As readers of this column will know, the Philippines got a well-deserved win in 2011 at the WTO in the dispute Thailand -- Customs and Fiscal Measures on Cigarettes from the Philippines (docketed as DS371). That 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. Clearly, the outcome of the case was quite important considering that the livelihood of thousands of Filipino farmers was at stake.

The WTO panel, in its report last Nov. 15, 2010 (a copy of the 426 page report can be viewed at https://docs.wto.org/dol2fe/Pages/FE_Search/DDFDocuments/107523/Q/WT/DS/371R.pdf), 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.

Thailand, predictably, appealed to the Appellate Body, with Thailand complaining about the panel’s findings under Article III:2, Article III:4, and Article X:3 (b) of the GATT 1994. The AB, however, in its Report dated June 17, 2011, essentially upheld all of the panel’s key findings and, thus, handed an overwhelming victory for the Philippines. A copy of the AB report can be found in http://www.wto.org/english/tratop_e/dispu_e/371abr_e.pdf.

The win was a highly welcome contrast to the country’s bizarre loss in Philippines -- Taxes on Distilled Spirits (docketed as DS396 and DS403). At that time, I wrote that the Thai cigarettes case should “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.”

That was then. The Thais, unfortunately, have managed to exploit an inherent and significant structural weakness in the WTO dispute settlement system and that is with regard to enforcing compliance with the panel (or AB) rulings. In our case, as reported by BusinessWorld on July 29, 2013 (Lack of Thai action scored), “The Philippines is disappointed with Thailand’s apparent procrastination over the implementation of a World Trade Organization (WTO) cigarette tax ruling. ‘While Thailand has made strides in implementing a number of measures, full compliance that adheres to WTO rules is yet to be realized,’ a Trade department statement yesterday quoted Assistant Secretary Ceferino S. Rodolfo as saying. ‘[B]ilateral engagements hoped to achieve this and it is, therefore, a disappointment for the Philippines that the information committed during the bilateral meetings has yet to be completely provided,’ Mr. Rodolfo added.”

The Thais, in turn, were reported to have declared that “Thailand will continue to discuss any technical issues arising out of these discussions with the Philippines and, as appropriate, with private stakeholders.” In short: dribble.

Compliance has always been the problem area for an otherwise impeccable dispute settlement system. Interestingly, the two biggest users of the WTO dispute system, the EU and the US, have been quite disengenous in that regard. The EU (see A Conflict of Institutions? The EU and GATT/WTO Dispute Adjudication; Christina L. Davis, 12 March 2007) has the Hormones case, while the US (see EU Fact Sheet) has the Foreign Sales Corp. case as a prime example. This issue of Thai’s non-compliance is expected.

In any event, as my University of Asia and the Pacific colleague George Manzano said in the BusinessWorld article, “the options available to the Philippines included requesting compensation, arbitration or retaliation.”

However, even that demands more intricate calculation: as Asim Imdad Ali points out (see Non-Compliance and Ultimate Remedies Under the WTO Dispute Settlement System, Journal of Public and International Affairs, 2003), “if a member does not comply, final enforcement remains problematic. The WTO authorizes countermeasures to be taken by individual states. These retaliatory provisions, however, fail on many counts: on effectiveness; on defeating the foundational principles of the WTO, such as free trade; by causing ‘double-injury’ to those who win the case; on being ‘the epitome of mercantilism’; and lastly, on favoring a power-based system and undermining the rule-based system of adjudication. Arguably, the WTO has the best dispute settlement system of any international organization. Nevertheless, the WTO does not have the best compliance system.”

Unfortunately, the seeming prevailing view within the WTO itself does not encourage censure of those delaying compliance: “The current design of the WTO’s dispute settlement mechanism, by operating temporarily as a system of ‘breach and pay,’ fulfills a crucial role as a systemic safety valve for rare scenarios where WTO members find it impossible to comply with the DSB’s recommendations and rulings within the ‘reasonable period of time’ as determined according to Article 21.3 of the DSU.” (Toleration of Temporary Non-Compliance: The Systemic Safety Valve of WTO Dispute Settlement Revisited, Claus Zimmerman, Trade, Law and Development, 2011).

So we’ll really have to do some deep and fast thinking if we are to truly protect our national interest.