EXAMINING WTO GOVERNANCE ON LABELLING

CASE STUDY OF THE EU PALM OIL FOOD LABELLING REGULATION

BY

FEITTY EUCHARISTI PANDJAITAN

JANUARY 21ST, 2014

TABLE OF CONTENTS

I. INTRODUCTION 1

II. THE LABELLING REGULATION UNDER THE TBT AGREEMENT 3

A. THE APPLICATION OF ARTICLE 2.1 OF THE TBT AGREEMENT 3

1. The Labelling Regulation Is a Technical Regulation 4

2. Like Products of Palm Oil 6

3. Imported Palm Oil Is Accorded Less Favourable Treatment than Like Products 7

(a) Modifying Conditions of Competition of Vegetable Oil Used in the EU Market 8

(b) Detrimental Impact of the Labelling Regulation and de facto Discrimination against Palm Oil

Exporters 11

(c) Genuine Relationship between the Labelling Regulation and Its Detrimental Impact 13

B. THE APPLICATION OF ARTICLE 2.2 OF THE TBT AGREEMENT 14

1. The Labelling Regulation Is a Trade Restrictive Measure 15

2. The Legitimate Objective of the Labelling Regulation 16

3. The Labelling Regulation Is More Trade Restrictive than Necessary 17

III. THE LABELLING REGULATION UNDER GATT 19

A. THE APPLICATION OF ARTICLE III: 4 OF GATT 19

B. THE EXCEPTIONS PROVIDED UNDER ARTICLE XX OF THE GATT 21

1. Article XX (b) of GATT and the Protection of the Consumers’ Health 21

2. Article XX (g) of GATT and the Conservation of Exhaustible Natural Resources 22

3. The Chapeau of Article XX of GATT 24

IV. CONCLUSION 26

1

I. Introduction

Labelling activity in international trade has been increasing in the past decade, driven

by consumer demand and government intervention.1 Nowadays we can see there are more

producers in the market that are introducing information on packaging to show that their

products are either healthy, environmental friendly, in support of a good cause or other

relevant information that could create a good image in favour of the customers’ choices.

Consumers have the right to be informed about the health aspects and other important

information about the products they use, and the government is expected to protect this right.2

World Trade Organization (the “WTO”) members generally agree that labelling

schemes can be economically efficient and useful for informing consumers, while they tend to

restrict trade less than other methods.3 Yet, there are serious concerns in the WTO over the

growing complexity of the labels and how this could impact the ability of industries in

developing countries as well as small businesses to export.4 This concern is understandable

since standards and regulations across nations are diverse, and labelling requirements may be

deliberately crafted by the government of one country to impose a cost disadvantage on foreign

competitors.5

1 James K.R. Watson, the WTO and the Environment Development of Competence Beyond Trade 173 Routledge

Research in International Economic Law (2013). 2 European Commission Directorate General of Health& Consumer Protection, Consumer Protection in the

European Union: Ten Basic Principles, http://ec.europa.eu/consumers/cons_info/10principles/en.pdf page 2

(last visited 14 November 2013). 3 WTO Environment, ‘Environment Issues: Labelling’, WTO website,

http://www.wto.org/english/tratop_e/envir_e/labelling_e.htm (last visited 13 November 2013). 4 See id. 5 Alan O. Sykes, Products Standards for Internationally Integrated Goods Markets 1-2 The Brookings

Institution (1995). (“Standards and regulations may be deliberately crafted to impose a cost disadvantage on

foreign competitors. They may also differ across jurisdictions as a result of divergent tastes, because of

variations in technology, income, or resource endowments, or even chance. It is thus common for goods that

conform to all pertinent standards and regulatory requirements in their country of origin to fail to conform

elsewhere. And even when conformity to foreign standards and regulations is not difficult, the burden of

demonstrating conformity to the satisfaction of consumers or regulators abroad can still be considerable.

”Technical barriers” thus arise both from the divergence of standards and regulations across nations, and from

the burden of establishing conformity with them or not they are divergent.”)

2

A WTO member country is free to set its own trade and environment policy objectives,

however, such policy is subject to a set of broadly applicable legal constraints and principles,6

as provided under the WTO Agreement. It is interesting to examine then, based on the

European Union Regulation No. 1169/2011 on the Provision of Food Information to

Consumers (the “Labelling Regulation”),7 how the WTO would govern the implementation of

labelling policies in its member countries. The Labelling Regulation, which will be effective

as of 13 December 2014,8 requires the labelling of palm oil in all European Union (the “EU”)

food products. 9 There appears to be a legitimate objective behind this Labelling Regulation;10

however, palm oil exporter countries are concerned that the impact of the Labelling Regulation

will harm the export of palm oil to the EU.11

Under WTO governance, the Labelling Regulation potentially violates EU obligations

to the extent that the measures create a less favourable treatment and more trade restrictive

6 See id. at 117. 7 European Commission Regulation 1169/2011, the Provision of Food Information to Consumers O.J. (L 304)

page 18-63, [hereinafter the Labelling Regulation], Art. 1 (2). 8 Sustainable Palm Oil Platform, Legislation & Voluntary Commitments,

http://www.sustainablepalmoil.org/consumers-retailers/retailers/legislation-and-voluntary-

commitments/#sthash.jzZ4kTmT.dpuf

(accessed 29 October 2013). 9 See the Labelling Regulation, supra note 7, Art. 18. (“(1) the list of ingredients shall be headed or preceded by

a suitable heading which consists of or includes the word ‘ingredients’. It shall include all the ingredients of the

food, in descending order of weight, as recorded at the time of their use in the manufacture of the food. (2)

Ingredients shall be designated by their specific name, where applicable, in accordance with the rules laid down

in Article 17 and in Annex VI.. (4) Technical rules for applying paragraphs 1 and 2 of this Article are laid down

in Annex VII.” and Part A of Annex VII of the EU Food Labelling Regulation governing the indication and

designation of ingredients by descending order of weight. Palm Oil is categorize as Vegetable Oil which may be

grouped together in the list of ingredients under the designation ‘vegetable oils’ followed immediately by a list

of indications of specific vegetable origin.) 10 CNN.com, Profitable Palm Oil Leaves Environment Poor, last updated 10:10 pm EDT, Friday July 6, 2012.

http://www.cnn.com/2012/07/06/world/asia/palm-oil-industry/index.html

(accessed 15 October 2013). (Palm oil has a bad reputation in the market and accused as damaging the health

and environment.) 11 Europe Negative Campaign Put Pressure on CPO Export (in bahasa version), Investor Daily news dated

Tuesday, 1 October 2013. http://www.investor.co.id/agribusiness/kampanye-negatif-eropa-tekan-ekspor-

cpo/69851.

(accessed on 13 October 2013). (Chairman of Indonesian Palm Oil Commission stated that palm oil export on

2013 decreased for 13% in comparation to 2012, one of the reason for this is EU Food Labelling Regulation.

Palm Oil exporter is concern that this new regulation will reduce the competitiveness of Indonesia palm oil

exports in the EU.)

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measures on the palm oil exporter in the EU market, and for this reason, the EU should revise

its Labelling Regulation. The underlying principle for this claim is governed by Article 2.1 and

Article 2.2 of the WTO Agreement on Technical Barriers to Trade (the “TBT Agreement”)

and the Article III:4 of the General Agreement on Tariffs and Trade 1994 (the “GATT”), which

will be described below.

II. The Labelling Regulation under the TBT Agreement

WTO member countries use the TBT Agreement as the existing guidance for labelling

and as a means to create the appropriate balance of rights and obligations for both mandatory

and voluntary labelling policies made by these countries.12 While WTO members have

flexibility in governing their own domestic standards, the WTO strictly governs the use of the

mandatory standards, known as a technical regulations, under Article 2 of the TBT Agreement.

For the purpose of examining whether the Labelling Regulation is in compliance with the

WTO, the section below will discuss this Labelling Regulation by first applying the principles

set under Article 2.1 and 2.2 of the TBT Agreement.

A. The Application of Article 2.1 of the TBT Agreement

Article 2.1 of the TBT Agreement states the following:

Members shall ensure that in respect of technical regulations, products imported from the

territory of any Member shall be accorded treatment no less favourable than that accorded to

like products of national origin and to like products originating in any other country.13

Therefore, Article 2.1 of the TBT Agreement combines the most-favoured nation

treatment obligation that prohibits discrimination through technical regulations among like

12 WTO Environment, supra note 3. 13 Agreement on Technical Barriers to Trade, 1868 U.N.T.S. 120 [hereinafter TBT Agreement] Art 2.1.

4

products imported from different countries and the national treatment obligation that prohibits

discrimination between domestic and imported like products.14

To show that a regulation does not comply with this provision, the following 3 (three)

elements should be demonstrated: (1) that the measure is classified as a technical regulation

within the meaning of Annex 1.1; (2) that the imported products must be “like” domestic

products and the products of other origins; and (3) that the treatment accorded to imported

products must be less favourable than that accorded to like domestic products and like products

from other countries.15

(1) The Labelling Regulation is a Technical Regulation

The TBT Agreement governs two types of documents known as standards and technical

regulations. A “standard” is a specification or set of specifications that relates to some

characteristic of a product or its manufacture, such as its size, dimensions, weight, design,

function, ingredients, or any number of other products attributes.16 Standards may or may not

be formally promulgated by a private or public standard-setting entity.17 Compliance with

standards is voluntary, and a product that does not conform to a standard could still be legally

permitted to be sold in the market.18 A technical regulation governs product characteristics or

specifications the same way as a standard, however, the difference is that compliance with

technical regulations is legally mandatory.19

14 Appellate Body Reports, United States – Certain Country of Origin Labelling (COOL) Requirements,

WT/DS384/AB/R/ WT/DS386/AB/R, adopted 23 July 2012, [hereinafter AB Report on US – COOL

Requirements] para. 267. 15 Appellate Body Report, United States – Measures Concerning the Importation, Marketing and Sale of Tuna

and Tuna Products, WT/DS381/AB/R, adopted 13 June 2012, [hereinafter AB Report on US – Tuna II] para.

229; Appellate Body Report, United States – Measures Affecting the Production and Sale of Clove Cigarettes,

WT/DS406/AB/R, adopted 24 April 2012, [hereinafter AB Report on US- Clove Cigarettes] para. 87; AB

Report on US- COOL Requirements, supra note 14. 16 Sykes, supra note 5, at 2. 17 See id. 18 See id. 19 See id.

5

Three criteria are used in the WTO to consider whether a measure falls within the scope

of “technical regulation” in the TBT Agreement: 1) the document must apply to an identifiable

product or group of products; 2) such document must describe one or more characteristics of

the product; and 3) compliance with the product characteristics under the document must be

mandatory.20

It is interesting to point out the development of what constitutes mandatory compliance

from the recent case involving the United States – Measures Concerning the Importation,

Marketing and Sale of Tuna and Tuna Products US (the “Tuna Dolphin II Case”). In the Tuna

Dolphin II Case, the determination of whether a standard could be a technical regulation has

undergone more than just considerations on whether the labelling is mandatory.21 The

Appellate Body in the Tuna Dolphin II Case asserted that the US dolphin safe label was

mandatory and not voluntary, based on the fact that the US refused to recognize any standards

of method other than their own for setting what was dolphin safe, while Mexicans as the

claimant had shown that their methods were also dolphin safe under the standard of the

Agreement on the International Dolphin Conservation Program (AIDCP). 22 Therefore, a

20 Appellate Body Report, European Communities – Trade Description of Sardines, WT/DS231/AB/R, adopted

23 October 2002, DSR 2002:VIII, 3359, para. 176. 21 AB Report on US-Tuna II, supra note 15, para 199. 22 Panel Report, United States – Measures Concerning Importation, Marketing and Sale of Tuna and Tuna

Products WT/DS381/R, adopted 13 June 2012, as modified by Appellate Body Report WT/DS381/AB/R,

[hereinafter “Panel Report on US- Tuna II”] para. 7.143 and 7.144; see also AB Report on US-Tuna II, supra

note 15, para. 1, para. 2, para. 12. (In this case the Panel was established to consider a complaint by Mexico

regarding the consistency of certain measures imposed by the United States on the importation, marketing, and

sale of tuna and tuna products with the General Agreement on Tariffs and Trade 1994 and the Agreement on

Technical Barriers to Trade. The case involved a measure imposed by US under the Dolphin Protection

Consumer Information Act which set out the terms of the ‘dolphin-safe’ labelling scheme”. Mexico was

prohibited from using the term “marine mammal-safe” label as an alternative to Dolphin-Safe. In its appeal to

the Appellate Body under Tuna Dolphin II Case, US contends that the measures should not be regarded as

technical regulation because compliance with the dolphin safe label is not mandatory within the meaning of

Annex 1.1 to the TBT Agreement. US further argues that compliance with a labelling requirement is mandatory

within the meaning of Annex 1.1 if there is a requirement to use a particular label in order to place a product for

sale on the market, while by contrast, compliance with a labelling requirement is not mandatory in situations

where producers retain the option of not using the label. Mexico claimed that the measures was mandatory and

not voluntary, based on the fact that the US refused to recognize any standards other than their own for setting

what was dolphin safe while Mexicans claim that their methods are also dolphin safe under the Agreement on

the International Dolphin Conservation Program.)

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labelling standard could also be regarded as a technical regulation23 and have a mandatory

character if the requirement to use the label became mandatory.24

The Labelling Regulation established the principles, requirements, and responsibilities

governing food information, and in particular food labelling.25 Article 18 of the regulation

stated that “(1) the list of (food) ingredients shall be headed or preceded by a suitable heading

which consists of or includes the word ‘ingredients’. It shall include all the ingredients of the

food, in descending order of weight, as recorded at the time of their use in the manufacture of

the food.”26 It further stated that “(2) Ingredients shall be designated by their specific name.”27

All public and private carrying out activities related to all stages of production, processing, and

distribution of food shall comply with the labelling requirement set in this regulation.28 Since

labelling palm oil is mandatory, the Labelling Regulation therefore shall be regarded as a

technical regulation.

(2) Like Products of Palm Oil

The determination of likeness under Article 2.1 of the TBT Agreement is related to the

“nature and extent of a competitive relationship between and among products.”29 Palm oil is

an edible vegetable oil produced from the pulp of the fruits of palms and is solid at room

23 AB Report on US-Tuna II, supra note 15, para. 230. 24 Panel Report on US-Tuna II, supra note 22, para. 7.143, para. 7.144 and para. 1, para. 2, para. 12. 25 The Labelling Regulation, supra note 7, at Art. 1 (2). 26 The Labelling Regulation, supra note 7, at Art. 18. 27 See id. 28 Commission Regulation 178/2002, Laying Down the General Principles and Requirements of Food Law,

establishing the European Food Safety Authority and Laying Down Procedures in Matters of Food Safety O.J.

(L 31), page 1-24, Article 2.2 (food business means any undertaking, whether for profit or not and whether

public or private, carrying out any of the activities related to any stage of production, processing and

distribution of food” Article 2.3 ‘food business operator’ means the natural or legal persons responsible for

ensuring that the requirements of food law are met within the food business under their control.) 29 AB Report on US- Clove Cigarettes, supra note 15, para. 111. Further, in the Appellate Body Report,

European Communities – Measures Affecting Asbestos and Asbestos – Containing Products, WT/DS135/AB/R,

adopted 5 April 2001, DSR 2001:VII, 3243, para. 101. (Like products is defined as: (i) The properties, nature

and quality of the products; (ii) Their end use; (iii) Consumer tastes and habits; (iv) Tariff classification of the

products.)

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temperature.30 In the EU, palm oil is usually sold and consumed in its refined form, i.e. after it

has been bleached and deodorized.31 Palm oil contains 50% saturated fat and in food products

it is often used together with other fats and oils which together determine the fatty acid

composition and eventually the effects on health.32 In the EU, palm oil shares its competition

in the market with rapeseed oil, sunflower oil, and soya oil.33 In 2011, palm oil was the second

most consumed vegetable oil in the EU after rapeseed oil.34 The statistics released in 2012 by

the Federation Representing the European Vegetable Oil and Protein meal Industry in Europe

(FEDIOL) showed that all palm oil was imported from outside the EU, while, its competitor

rapeseed oil was produced domestically.35 Hence, these vegetable oils are to be regarded as

like products.

(3) Imported Palm Oil Is Accorded Less Favourable Treatment than Like Products

Less favourable treatment is the most compelling element in the WTO dispute, in that

it prohibits not only de jure but also de facto less favourable treatment for imported like

products.36 An analysis of less favourable treatment involves an assessment of whether the

technical regulation at issue modifies the conditions of competition in the relevant market to

the detriment of the group of imported products vis-a vis the group of like domestic products.37

With attention to the Tuna-Dolphin II Case, the WTO Appellate Body breaks down its less

favourable treatment analysis in two parts. First, it assesses whether the measure modifies the

30 European Food Information Council, Frequently Asked Questions Palm Oil Q&A, EUFIC.ORG,

http://www.eufic.org/page/en/page/FAQ/faqid/question-answer-palm-oil/ (last updated 28/10/2013). 31 See id. 32 See id. 33 Federation Representing the European Vegetable Oil and Protein meal Industry in Europe (FEDIOL),

2012 Annual Statistics on Vegetable Oils Production, Imports, Exports and Consumption, FEDIOL.EU (Aug.

14, 2013), http://www.fediol.eu/data/1376905766Stat%20oils%202012.pdf. (According to its 2012 annual

statistics on 2011 Consumption of Vegetable Oil and Fats, rapeseed oil is the most consume vegetable oil in the

EU, while palm oil and sunflower oil rank as the number 2 and 3.) 34 See id. 35 FEDIOL, supra note 33. 36 AB Report on US- COOL Requirements, supra note 14, para. 259. 37 AB Report on US- Clove Cigarettes, supra note 15, para. 180; AB Report on US-Tuna II, supra note 15, para.

215; AB Report on US- COOL Requirements, supra note 14, para. 268.

8

conditions of competition of the imported product with the local product or a product from

another country. Second, it reviews whether any detrimental impact reflects discrimination

against the imported product.38 Given these points, there should also be a relationship between

the factors of modifying the competition and its detrimental impact.39 These approaches will

be used to analyze the less favourable treatment caused by the Labelling Regulation below.

(a) Modifying Conditions of Competition of Vegetable Oil Used in the EU Market

In the Tuna Dolphin II Case, the WTO Appellate Body decided that less favourable

treatment does not find its evidence merely on the basis of the origin of the product;40 rather,

it finds its evidence in the context of “whether a measure modifies the conditions of

competition in the relevant market to the detriment of imported products.”41 The same question

of how labelling modifies conditions of competition in the market could be found in the WTO

dispute of United States – Certain Country of Origin Labelling (COOL) Requirements

(hereinafter “COOL Case”). According to the COOL Case, labelling modifies conditions of

competition when there occurs different treatment to imported products that reduces

competitive opportunities of the product, while it creates an advantage or incentive for the

domestic producers in the relevant market.42

(i) The Labelling Regulation Creates Different Treatment of Palm Oil Exporters

38 AB Report on US-Tuna II, supra note 15, para. 231. 39 AB Report on US-Tuna II, supra note 15, para. 236-239. 40 AB Report on US-Tuna II, supra note 15, para. 224. (WTO Panel considered that Mexico failed to establish

that the measure affords treatment less favourable to Mexican tuna products since the measure do not inherently

discriminate on the basis of the origin of the product.) 41 AB Report on US-Tuna II, supra note 15, para. 214. 42 AB Report on US- COOL Requirements, supra note 14, para. 257. (WTO Panel identified three issues that it

would addressed in its analysis of whether the COOL measure affords less favourable treatment to imported

livestock. These issues are: (i) whether the different categories of labels under the COOL measure accord

different treatment to imported livestock; (ii) whether the COOL measure involves segregation and,

consequently, differential costs for imported livestock; and (iii) whether, through the compliance costs involved,

the COOL measure creates any incentive to process domestic livestock, thus reducing the competitive

opportunities of imported livestock.)

9

It is difficult to show that different treatment of palm oil exporters exists when the

differences occurred not as a direct result of the Labelling Regulation. The Labelling

Regulation seems to not discriminate against a specific country by enforcing the labelling of

palm oil. However, in determining whether a measure is de facto inconsistent with Article 2.1

of the TBT Agreement, the WTO Panel is of the view that one should carefully scrutinize the

particular circumstances of the case, that is, the design, architecture, revealing structure,

operation, and application of the technical regulation at issue, and, in particular, whether that

technical regulation is even-handed.43 Such an examination must take into account all the

relevant features of the market, which may include the particular characteristics of the industry

at issue, the relative market shares in a given industry, consumer preferences, and historical

trade patterns.44

Unlike other vegetable oil in the EU market, it is very important for palm oil to be

certified. Palm oil exporters, specifically Indonesia and Malaysia, received widespread

negative publicity in the EU market from environmental activists for causing destruction to the

forest and its ecosystem,45 a claim which is not addressed to the domestic like product, rapeseed

oil. As consumers in the EU are concerned with the environmental impact of palm oil

plantations, it seems that the Labelling Regulation promotes the use of certified sustainable

palm oil for the EU market. This promotion of certified palm oil is supported by the fact that

the Netherlands, the United Kingdom, and Belgium have set a goal of using only palm oil

certified by the Roundtable Sustainable Palm Oil (RSPO) by the end of 2015.46 The labelling

of specific vegetable oil in food as required by the Labelling Regulation will potentially lead

to a different treatment based on market preferences of consumers and certification standards

43 AB Report on US- Clove Cigarettes, supra note 15, para. 182; AB Report on US-Tuna II, supra note 15, para.

225. 44 AB Report on US COOL Requirements, supra note 14, para. 269. 45 CNN.com, supra note 10. 46 The Crop Site, thecropsite.com, reports, USDA Gain: EU-27 Oilseeds and Products Annual 2013 (14 May

2013), http://www.thecropsite.com/reports/?id=2062#sthash.hXywu9iN.dpuf.

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for palm oil. For this reason, the Labelling Regulation will create different treatment of the

palm oil exporters.

(ii) The Labelling Regulation Reduces Competitive Opportunities of Palm Oil and Creates

Incentives for Domestic Oil Producers

Article 2.1 of the TBT Agreement prohibits both de jure and de facto less favourable

treatment for imported like products.47 One of the approaches to assess whether a measure

accords de facto less favourable treatment was used by the WTO Appellate Body in the COOL

Case by analyzing whether the challenged measure entails a higher handling cost for the

imported product compared to the domestic product.48 Conclusively, the Panel was of the view

that although the implementation costs between imported and domestic products seems to be

the same, the labelling led to higher compliance costs for imported products,49 and for this

reason it seems logical that processing domestic products is in general less costly and more

viable than processing imported products.50 In COOL Case, the Panel observed that the more

different origins involved in the production of a meat, the more intensive the segregation

process in the supply and distribution that is required to ensure the labelling of the origin of

meat is accurate, and this led to a higher compliance costs.51

Many foods that use palm oil in the EU do not explicitly state the specific sources of

vegetable oil used in their product labels.52 The Labelling Regulation will result in a higher

cost of compliance for the palm oil user. As a direct consequence of the Labelling Regulation,

47 AB Report on US- COOL Requirements, supra note 14, para. 259. 48 See id. 49 Panel Reports, United States – Certain Country of Origin Labelling (COOL) Requirements, WT/DS384/R /

WT/DS386/R, adopted 23 July 2012, as modified by Appellate Body Reports WT/DS384/AB/R /

WT/DS386/AB/R,[hereinafter “Panel Report on US- COOL] para. 7.331 and para. 7.346. 50 See id., para. 7.349. 51 Panel Report on US- COOL, supra note 49, para. 7.331 and para. 7.346. 52 European Food Information Council, supra note 30. (From December 2014, European Legislation No

1169/2011 obliges all individual oils present in food to be indicated on the label. No specific labelling of trans

fatty acids will be required. However, by 31 December 2014 the European Commission shall submit a report on

the presence of trans fatty acids in foods to decide whether further information on the label is required or their

use should be restricted.)

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the food producer will need to change and revise their food packaging to reflect the use of palm

oil in the product. As an indirect consequence, since uncertified palm oil could harm the

reputation of the food products in the market, there is a potential demand of replacement of

uncertified palm oil with a certified one. Considering the EU market wants the palm oil used

in food to be certified, the cost of palm oil will consequently increase due to the certification

expenses. The impact of complying with the Labelling Regulation thus will increase the

production cost of palm oil as a result of the requirement to certify palm oil.

In the COOL Case, modifying conditions of competition occurs when a measure

imposed higher processing costs to imported raw material products and created an incentive

for the producer to use the raw material from the domestic product. 53 Certification of palm oil

product will increase the cost of production to palm oil exporters which make the price less

competitive in the market. Generally producers will seek to limit their production costs, and

thus under a cost and benefit consideration, the increase of palm oil prices would create a

disincentive for using palm oil. One of the alternatives for producers would be to seek for like

products that costs less and could be easily found in the domestic market, such as rapeseed oil.

As such, the Labelling Regulation reduces the competitiveness of palm oil price and creates an

incentive to use cheaper domestic like product, 54 such as rapeseed oil.

(b) Detrimental Impact of the Labelling Regulation and De Facto Discrimination against

Palm Oil Exporter

The WTO Appellate Body considers a broad definition of detrimental impact in the

Tuna Dolphin II Case. In that case, the Appellate Body acknowledged that any adverse impact

on competitive opportunities for imported products vis-à-vis like domestic products that is

caused by a particular measure may potentially be relevant in consideration of detrimental

53 Panel Report on US- COOL, supra note 49, para. 7.372 and 7.381, 7.420, and 7.548. 54 See id.

12

impact.55 As another illustration, the WTO Appellate Body considers that any adverse impact

on competitive opportunities for imported products could also include the regulatory

distinction that is based on different processing methods and not only on the basis of national

origin.56

According to the Tuna Dolphin II Case, the lack of access by a Mexican tuna producer

to the labelling requirement of dolphin safe is regarded as a detrimental impact on the

competitive opportunities for Mexican tuna products in the US market,57 since the label has a

significant commercial value in the US market.58 A report by Deloitte in 2012 expresses that

consumers in developing countries’ markets, including some countries in the EU, were

responding to sustainability concerns.59 Based on this report, the environmental label of a

product has a value in the market.

The labelling of palm oil in a product without any certification information will

potentially dissuade the customer from purchasing that product. The Labelling Regulation will

create an impact on the market environment of palm oil since it will put an increased demand

or even pressure for certified palm oil products. Certification of palm oil will create an

additional cost and will reduce the attractiveness of uncertified palm oil, thereby increasing

costs to palm oil exporters.60 This condition is similar to regulatory protectionism, whereby a

55 AB Report on US-Tuna II, supra note 15, para. 225 and AB Report on US- Clove Cigarettes, supra note 15,

footnote 372 of para. 179. 56 AB Report on US-Tuna II, supra note 15, para. 225. 57 AB Report on US-Tuna II, supra note 15, para. 235. 58 Panel Report on US-Tuna II, supra note 22, para. 7.289 - 7.291. (According to the WTO Panel, Mexico had

presented evidence concerning retailers’ and final consumers’ preferences regarding tuna products, which, in

the Panel’s view, confirmed the value of the “dolphin-safe” label in the US market and thus the label constitutes

an “advantage” on the US market.) 59 Deloitte Consumer Business, Food and Beverage 2012 a Taste of Things to Come, page 8.

https://www.deloitte.com/assets/Dcom-Russia/Local%20Assets/Documents/Foodandbeverage202012_web.pdf.

(The interview conducted by Deloitte in 2007 among 93 top-level executives at leading food and beverage

companies in Europe, Middle East, and Africa (EMEA) and the Americas. Based on this interview,

health/nutrition and sustainability/environment are among key issues driving the food and beverage industry

forward.) 60 UK Department for Environment, Food and Rural Affairs, Review of Policy Options Relating to Sustainable

Palm Oil Procurement, page 5, April 2011.

13

regulatory objective causes disadvantage to the foreign producers and increases the costs of

production outside the regulatory jurisdiction which is discriminative in nature.61 The

Labelling Regulation therefore creates a detrimental impact on the price of palm oil and is de

facto discriminative against palm oil exporters.

(c) Genuine Relationship between the Labelling Regulation and its Detrimental Impact

In order for a measure to be found to modify the conditions of competition in the

relevant market to the detriment of imported products, there must be a “genuine relationship”

between the measure at issue and the adverse impact on competitive opportunities for imported

products.62 This relationship is not easily demonstrated since the effects of technical barriers

in a certain country’s regulation are typically hard to measure, as they are often hidden in the

firm-specific costs of modifying a product to meet a standard or regulation, in the costs of

testing and certification procedures and their attendant delays, or, in the ways that

noncompliance with a standard may affect consumer purchasing decisions.63 In the WTO case

of China – Measures Affecting Imports of Automobile Parts, the WTO Appellate Body

considered that while a measure may not require certain treatment of imports, it may

nevertheless create incentives for market participants to behave in certain ways, and thereby

treat imported products less favourably.64

61 Alan O. Sykes, Regulatory Protectionism and the Law of International Trade, 66 U. Chi. L. Rev. 1, 3-4

(1999). (“regulatory protectionism” as any cost disadvantage imposed on foreign firms by a regulatory policy

that discriminates against them or that otherwise disadvantages them in a manner that is unnecessary to the

attainment of some genuine, nonprotectionist regulatory objective. Regulatory protectionism can result either

from substantive regulatory requirements or from the mechanisms used by regulators to ensure compliance with

substantive requirements (the “conformity assessment” process). Further, it can increase the costs of production

for firms outside of the regulating jurisdiction (“foreign firms”) and thereby confer a competit ive advantage on

domestic firms). 62 Appellate Body Report, Thailand – Customs and Fiscal Measures on Cigarettes from the Phillipines,

WT/DS371/AB/R, adopted 15 July 2011, para. 134; Appellate Body Report, Korea – Measures Affecting

Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001,

DSR 2001:I, 5, [hereinafter “AB Report on Korea- Beef”] para. 137; AB Report on US- COOL Requirements,

supra note 14, para. 270. 63 Sykes, supra note 5, at 10. 64 Appellate Body Reports, China – Measures Affecting Imports of Automobile Parts, WT/DS339/AB/R /

WT/DS340/AB/R / WT/DS342/AB/R, adopted 12 January 2009, DSR 2009:I ,3, para. 195 and 196; AB Report

on US- COOL Requirements, supra note 14, para. 270.

14

Although the Labelling Regulation does not directly lead to palm oil certification, the

Labelling Regulation creates market conditions which pressure the food producers to use

certified palm oil. At present RSPO is the most broadly recognized framework reference for

sustainability in palm oil, which defines standards for plantations in the sustainable and the

environmental aspect.65 RSPO membership and certification for palm oil are operationally and

cost prohibitive for hundreds of small and medium suppliers, as well as those that are only

using a very small amount of palm oil.66 Palm oil labelling discriminates against small scale

palm oil farmers that are lacking access to obtain certification due to the expensive cost of

certification of RSPO.67 Thus, the Labelling Regulation promotes the certification of palm oil,

which is costly for the palm oil exporter, and thus is detrimental to the competitiveness of palm

oil prices and exports to the EU market.

B. The Application of the Article 2.2 of the TBT Agreement

Article 2.2 of the TBT Agreement states that technical regulations should not be

prepared, adopted, or applied with a view to or with the effect of creating unnecessary obstacles

to international trade.68 As such, a WTO member Country shall not create regulations that are

more trade-restrictive than necessary to fulfil a legitimate objective by taking into account the

risks non-fulfilment would create.69 There are several elements that must be observed in

assessing noncompliance with this provision: whether the measure is trade restrictive, whether

the objective pursued by the measure is legitimate, and, considering there is a legitimate

65 UNEP Global Environmental Alert Service, Thematic Focus: Ecosystem Management and Resource

Efficiency, Oil Palm Plantations: Threat and Opportunities for Tropical Ecosystems, page 6, December 2011.

http://www.unep.org/pdf/Dec_11_Palm_Plantations.pdf

(Accessed 1 November 2013). 66 UK Department for Environment, Food and Rural Affairs, UK Statement on Sustainable Palm Oil, 1 year on

progress report, November 2013. Page 7.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/259839/pb14061-palm-oil-

progress-report-131120.pdf. 67 See id. 68 The TBT Agreement, supra note 13, at Article 2.2. 69 AB Report on US- COOL Requirements, supra note 14, para. 377.

15

objective, whether the measure is more trade restrictive than necessary to fulfil its objective.70

These are the elements that will be further examined below.

(1) The Labelling Regulation is a Trade Restrictive Measure

In the COOL Case, the Appellate Body considers that the demonstration of a trade

restrictive measure does not require demonstration of any actual trade effects but rather focuses

on the competitive opportunities available to imported products.71 The Appellate Body in the

COOL Case also considers that a measure is trade restrictive when a measure negatively affects

imported products’ conditions of competition in the market by imposing higher costs in the

production process of the imported product.72

Palm oil production is the most efficient production of oil per hectare of cultivated

land.73 Palm oil’s efficient production led to cheaper costs and established a cheaper price

compared to other oils. In the food industry, palm oil is used as frying fat and as an ingredient

in a wide range of foods such as biscuits, margarine, snacks, and bakery products. 74 Palm oil

competitiveness in the global market also lies in its price.

An increased cost of production for palm oil exporters will affect the competitiveness

of the palm oil price in the EU market. Based on the OECD-FAO Agricultural Outlook 2011-

2020, the EU is the world’s leading importer of vegetable oil, accounting for almost 18% of

the market.75 Most of the EU’s vegetable oil consumption in 2010 was for food use.76 In the

70 AB Report on US- COOL Requirements, supra note 14, para. 358. 71 AB Report on US- COOL Requirements, supra note 14, para. 359. 72 See id. 73 UK Department for Environment Food & Rural Affairs, Sustainable Production of Palm Oil, UK Statement,

page 4, October 2012

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/256254/pb13833-palm-oil-

statement-1012.pdf.

(Accessed 1 November 2013). 74 See id. 75 Organization for Economic Cooperation and Development (OECD) and the Food and Agriculture

Organization (FAO), Agricultural Outlook 2011-2020, [hereinafter “OECD – FAO Agricultural Outlook”) at

114 (June 2011). 76 See id. at 109. (See Figure 5.2 and page 118, Annex 5.A, Table 5.A.1 World Oilseed Projections.)

16

same report, OECD-FAO depicted that Indonesia along with Malaysia will lead the increase

in global vegetable oil output and its market share; however, growing environmental

constraints could alter this projection.77 As an example of the possible alteration, various

companies in the palm oil supply chain in the Netherlands already declared their commitment

to use sustainably produced (RSPO-certified) palm oil by 2015.78 As such, there is less

opportunity for noncertified palm oil producers and suppliers to the EU market. Alternatively,

certified palm oil producers will also find their palm oil products’ price to be less competitive

due to the cost of certification of its product. Given these facts, the Labelling Regulation is a

trade restrictive measure for palm oil producers to export to the EU.

(2) The Legitimate Objective of the Labelling Regulation

The legitimacy of a measure’s objective can be found in the “genuine nature” of the

objective, which is “justifiable” and “supported by relevant public policies or other social

norms.”79 Legitimate objectives under Art. 2.2 of the TBT Agreement could be national

security requirements, the prevention of deceptive practices, and the protection of human

health or safety, animal or plant life or health, or the environment. 80

The EU Food Labelling objective is clear. It is designed to protect the health and well-

being of consumers in the EU while at the same time guaranteeing consumers’ right to

information and to make informed choices, which can be influenced by either health,

economic, environmental, social and ethical considerations.81 The measure was issued with the

purpose of serving the interests of the internal market by simplifying the law, ensuring legal

77 OECD-FAO Agricultural Outlook, supra note 75, at 108. 78 The Dutch Task Force Sustainable Palm Oil, Manifesto of the Task Force Sustainable Palm Oil, (November

2010).

http://www.taskforceduurzamepalmolie.nl/Portals/4/download/Manifesto_Task_Force_Sustainable_Palm_Oil.p

df 79 AB Report on US- COOL Requirements, supra note 14, para. 361. 80 The TBT Agreement, supra note 13, at Art. 2.2 of the TBT Agreement. (In assessing such risks, relevant

elements of consideration are, inter alia: available scientific and technical information, related processing

technology or intended end-uses of product.) 81 The Labelling Regulation, supra note 7, Recitals.

17

certainty, and reducing administrative burdens; it benefits citizens by requiring clear,

comprehensible, and legible labelling of foods.82 Thus, there appears to be a legitimate

objective behind this regulation.

(3) The Labelling Regulation is More Trade Restrictive than Necessary

Article 2.2 of the TBT Agreement governs that a measure shall not be more trade

restrictive than necessary to fulfil its objective.83 In doing so, there should be an assessment of

the objective of a measure according to what is revealed in its text, design, architecture, and

structure, as well as through various statements made by legislators during the legislative

process of enactment.84 The WTO interpretation in the COOL Case is that the labelling

measure fulfils its objective when the information on labels as prescribed by the measure

ensures meaningful information for consumers.85 The ability of a labelling regime to fulfill its

objective will also depend on the capability of labels to convey clear and accurate

information.86

The labelling of palm oil might not provide meaningful, clear, and accurate information

to food consumers. In terms of health and nutrition, the relationship between nutrition and

health must be considered over the whole diet and not in terms of single food items, while

paying attention to recommended intakes for saturated fat.87 In reference to industrial

processing, packaging, and marketing, constant food label adaptations would in any case be

disproportionate in comparison to the expected consumer benefits 88

and unnecessarily increase

82 Id. at Recital (9). 83 AB Report on US- COOL Requirements, supra note 14, para. 362. 84 See id. 85 AB Report on US- COOL Requirements, supra note 14, para. 364. 86 AB Report on US- COOL Requirements, supra note 14, para. 362. 87 European Food Information Council, supra note 30. (At the same time, using palm oil in place of partially

hydrogenated vegetable oils reduces the content of trans fats in foods made with these oils. Both saturated and

trans fat can raise LDL (bad) cholesterol levels. However, unlike saturated fats, trans fats also lead to a fall in

HDL (good) cholesterol and raise blood triglyceride levels, both of which are associated with an increased risk

of coronary heart disease. In overall, the European Food Safety Authority recommends that intakes of saturated

fats and trans fats be as low as possible.) 88 Federation Representing the European Vegetable Oil and Protein meal Industry in Europe (FEDIOL),

18

the amount of information provided on the label without a real benefit for the consumer.89

Ultimately, information on vegetable origin is insufficient for food consumers’ dietary

consideration, and thus the labelling is not an appropriate means to fulfil the objective of the

Labelling Regulation.

In the Tuna Dolphin II Case, the Panel found that US exclusive dolphin safe labelling

is more trade restrictive than necessary to fulfill its legitimate objectives of protecting dolphin

since Mexican tuna captured under the alternative AIDCP standard could also have the similar

dolphin protection result.90 From this consideration, a measure could be more trade restrictive

than necessary when there is an alternative means that can be used by a producer to achieve

the same objectives. As having mentioned above, an accurate information on the nutrition

contained in food ingredients is more beneficial to the consumers’ health rather than the

specific detail of the ingredients.91 Providing an accurate nutritional information of the

vegetable oil is a better alternative to food consumers’ health. Thus, the labelling of palm oil

in food products is more trade restrictive than necessary to achieve its legitimate objective of

protecting the health of the food consumers.

Having considered the above assessment, the Labelling Regulation creates a less

favourable treatment and is more trade restrictive than necessary to palm oil exporter. In the

light of the above reasons, by implementing the Labelling Regulation, the EU has violated

Article 2.1 and Article 2.2 of the TBT Agreement.

Labelling Food, FEDIOL.EU (Aug. 14, 2013),

http://www.fediol.eu/web/labelling%20food/1011306087/list1187970148/f1.html

(This is a statement made by FEDIOL, an Associations of seed crushers and oil processors established in the

EU. FEDIOL members comply with an EU Code of Refining that lead to standard refined vegetable oils and

fats.) 89 See id. 90 Panel Report on US-Tuna II, supra note 22, para. 7.620 and 8.1 (b). 91 European Food Information Council, supra note 87.

19

III. The Labelling Regulation under GATT

Aside from the TBT Agreement, the Labelling Regulation will also be noncompliant

with the national treatment provision under Article III of GATT. The fundamental purpose of

Article III of GATT is to ensure equality of competitive conditions between imported and like

domestic products.92 This provision applies to laws, regulations, and requirements affecting

the internal sale, offering for sale, purchase, transportation, distribution, or use of products

(trading rules).93 Exceptions for Article III can be found in Article XX of GATT.94 This section

will explain whether the Labelling Regulation creates unequal competitive conditions between

palm oil and rapeseed oil specifically under Article III:4 of GATT. Following the discussion,

this section will also argue why this regulation might not be justified under the Article XX of

GATT.

A. The Application of Article III:4 of GATT

Article III:4 of GATT accords national treatment to imported products whereby

imported products shall not be treated less favourably than domestic products. 95 This provision

was made to assist the goal of reducing restraints on imports96 and applies not just to bound

products.97

92 Appellate Body Report, Canada – Certain Measures Concerning Periodicals, WT/DS31/AB/R, adopted 30

July 1997, DSR 1997:I, 449, page 18. 93 Birgitte Egelund Olsen Et Al., WTO Law from a European Perspective 143 (The Netherlands, Kluwer Law

International BV. 2012). 94 Watson, supra note 1, at 182. 95 General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement Establishing the World

Trade Organization, Annex 1A, THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND OF

MULTILATERAL TRADE NEGOTIATIONS 17 (1999), 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994)

[hereinafter GATT]. (Art. III:4 of GATT. “The products of the territory of any contracting party imported into

the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to

like products of national origin in respect of all laws, regulations and requirements affecting their internal sale,

offering for sale, purchase, transportation, distribution or use.”) 96 John H. Jackson, National Treatment Obligations and Non-Tariff Barriers, 10 Mich. J. Int'l L. 207 (1989). 97 See id. (An important policy behind this rule is to prevent domestic tax and regulatory policies from being

used as a protectionist measure that would defeat the purpose of tariff bindings.)

20

Three important elements must be proven to claim a violation of Article III:4 of GATT.

First, the imported and the domestic products at issue must be ‘like products.98 As described

above, palm oil and rapeseed oil are considered “like products.” Second, the measure at issue

must be a law, regulation, or requirement affecting their internal sale, offering for sale,

purchase, transportation, distribution or use.99 The Labelling Regulation obviously covers the

sale and distribution of a food product. The last element to be proven is that imported products

are accorded ‘less favourable’ treatment than that accorded to like domestic products.100

The term “treatment no less favourable” in Article III:4 of GATT, similar to Article 2.1

of the TBT Agreement, prohibits both de jure and de facto less favourable treatment.101 The

less favourable treatment standard under this provision calls for effective equality of

opportunities for imported products in respect of the application of laws, regulations, and

requirements affecting their internal sale.102 If there is ‘less favourable treatment’ of the group

of the ‘like’ imported products, there is conversely ‘protection’ of the group of ‘like’ domestic

products.103

Although both palm oil and rapeseed oil de jure receive the same labelling treatment,

the impact of the Labelling Regulation is in fact is different. As examined under Article 2.1 of

the TBT Agreement above, labelling will create a condition where palm oil used for food

products needs to be certified as environmentally sustainable palm oil in favour of EU market

preference. This condition is discriminatory since the regulation does not create a condition

98 AB Report on Korea- Beef, supra note 62, para. 131. 99 See id. 100 See id. 101 AB Report on US- Clove Cigarettes, supra note 15, para. 100 and 175-180; AB Report on US-Tuna II, supra

note 15, para. 214, 215, and 236-239; and AB Report on US COOL Requirements, supra note 14, para. 269. 102 Autar Krishen Koul, Guide to the WTO and GATT, Economics, Law and Politics 115 Kluwer Law

International (2005). 103See id.

21

that requires palm oil like products to do so. Thus, the labelling will create a less favourable

treatment of palm oil in the EU.

B. The Exceptions Provided under the Article XX GATT

EU noncompliance with Article III:4 GATT can be exempted under conditions

provided in Article XX of GATT. There is a two-step analysis to demonstrate that a measure

is justified under this provision.104 In the first order, a measure should fulfil a condition

between clause (a) to (j) of Article XX GATT.105 Providing that the condition is covered under

this provision, a measure should also satisfy the requirements imposed by the opening clause

or the Chapeau of Article XX.106 In relation to the Labelling Regulation, the relevant conditions

to be applied are Article XX (b) and Article XX (g) of GATT. Having said this, the following

section will discuss why these clauses might not be applicable to the Labelling Regulation.

(1) Article XX (b) of GATT and the Protection of the Consumers’ Health

In respect of Article XX (b) of GATT, the labelling of palm oil in food is not necessary

to protect EU consumers’ health. An advance study on palm oil shows that the impact of palm

oil is often misunderstood, if not overrated.107 Scientific evidence shows that all oils and fats

contain both saturated and unsaturated fatty acids.108 Palm oil does have high saturated fat and

low polyunsaturated fat, which is claimed to contribute to heart disease.109 However, there are

no health concerns specific to palm oil.110 Moreover, palm oil contains only 50% saturated fat,

104 Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products,

WT/DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 2755, [hereinafter “AB Report on US-Shrimp”]

para. 117-119. 105See id. 106 See id. 107 Donald J. McNamara Ph.D. (2010) Palm Oil and Health: A Case of Manipulated Perception and Misuse of

Science, Journal of the American College of Nutrition, 29:sup3, 240S-244S,

DOI:10.1080/07315724.2010.10719840. 108 European Food Information Council, supra note 30. 109 First Printing; May 2005, Center for Science in the Public Interest, Ellie Brown, Ph.D., Michael F. Jacobson,

Ph.D., Cruel Oil How Palm Oil Harms Health, Rainforest & Wildlife, page iv. 110 European Food Information Council, supra note 30.

22

which compares favourably to the saturated fat content of other fats of similar application:

coconut (92%), palm kernel (84%), butter (66%), cocoa butter (62%) and tallow (54%).111

As an important consideration, palm oil is found to be a better alternative for food use

compared to its like products. In the United States for example, the American Heart

Association in 1968 recommended that people consume less than 10% of calories as saturated

fats for lowering coronary heart disease risk and choose only foods that are fat free, saturated

fat-free, and cholesterol free.112 As a result, US food companies started switching palm oil to

hydrogenated soybean oil, until more advanced research found that the hydrogenated soybean

oil contained a more harmful substance known as trans-fat, which increases the risk of diabetes,

impairs cardiac rhythm, or raises blood cholesterol level.113 Now in the United States, palm oil

is used as an alternative by food producers to soybean oil114 since it does not contain trans-fat.

Palm oil in the EU market is often used together in food products with other fats and

oils which together determine the fatty acid composition and eventually the effects on health.115

Likewise palm oil is not listed in EU as a ‘high risk’ product that is considered as harmful to

human health.116 Thus, the exception under Article XX (b) of GATT does not apply to the

Labelling Regulation.

(2) Article XX (g) of GATT and the Conservation of Exhaustible Natural Resources

It is unlikely that Article XX (g) of GATT provides justification in this case either.

Article XX (g) of GATT prescribed that WTO member countries may be noncompliant with

111 European Food Information Council, supra note 30. 112 McNamara, supra note 107, at 241S. 113 See id. at 243S. 114 Brown, supra note 109, page 2-3. 115 European Food Information Council, supra note 30. 116 European Commission Regulation 669/2009, the Implementing Regulation No 882/2004 of the European

Parliament and of the Council as regards the increased level of official controls on imports of certain feed and

food of non-animal origin and amending Decision 2006/504/EC O.J. (L 194) page 11-21. (A 'high-risk' product

is feed or food that is either a known, or an emerging, risk to public health. This may be due to the presence of

contaminants and/or undesirable substances such as aflatoxins, Salmonella or pesticides. A list of the 'high-risk'

products, country of origin and the frequency of checks can be found at Annex I of Commission Regulation

(EC) 669/2009, as amended by Commission Implementing Regulation (EU) 925/2013 of 25 September 2013.)

23

GATT if such noncompliance is “relating to the conservation of exhaustible natural

resources.”117 Palm oil plantation was accused as a main factor of forest destruction; and

therefore a measure imposed on the use of palm oil might find its justification as an effort to

conserve natural resources.118 Despite this accusation, the objective of Article XX (g) GATT

seems not to be in line with the objective of the Labelling Regulation.

Forests can be defined as natural resources covered by the Article XX(g) of GATT.

The definition of resource in this Article could be broad, covering the living and nonliving;119

however, the phrase “relating to” has a narrow interpretation, where it means that a measure

shall be primarily aimed at the objective under consideration.120 As such, the term “relating to”

in this Article XX (g) indicates that the WTO member country must be able to easily prove

that the regulation is primarily aimed at the environmental objectives stated in it.121 The

Labelling Regulation aims to make safe use of food while at the same time allow the consumers

to make an informed choice.122 Protecting forests is not the primary objective of the Labelling

Regulation. Therefore, it is unlikely that the EU can justify its Labelling Regulation under

Article XX(g) of GATT.

Another important concept under international law that should be considered in

interpreting this exception is the fact that a country can effectively control the conservation of

an exhaustible natural resource only to the extent that it is under its jurisdiction.123 The labelling

of palm oil tries to cover the production of goods that is happening outside its jurisdiction.

117 GATT Article XX (g). 118 UNEP Global Environmental Alert Service, supra note 66, page 3. (There is growing awareness that the

greater production of palm oil can increase the risk of destruction to tropical rainforest and drainage of peat land

causing impacts on biodiversity and climate change.) 119 AB Report on US- Shrimp, supra note 104, para. 127. 120 Ernst Ulrich Petersmann, the GATT/WTO Dispute Settlement System: International Law, International

Organizations and Dispute Settlement, Kluwer Law, London, 1997, p.99. 121 Watson, supra note 1, at 199. 122 Commissions Health and Consumer Directorate General Working Group, Questions and Answers on the

application of the Regulation (EU) No 1169/2011 on the provision of food information to consumers (31

January 2013), http://ec.europa.eu/food/food/labellingnutrition/foodlabelling/docs/qanda_application_reg1169-

2011_en.pdf 123 Autar Krishen Koul, supra note 102, at 317.

24

Whether the extraterritoriality impact of the Labelling Regulation is justified for public interest

or good cause, there are various opinions in support or against this, which nonetheless make

the application of this Article in labelling becomes more difficult.

(3) The Chapeau of the Article XX of GATT

Under the Chapeau of Article XX of GATT, a measure should not be applied “in a

manner which would constitute a means of arbitrary or unjustifiable discrimination between

countries where the same conditions prevail, or as a disguised restriction on international

trade.”124 The Appellate Body provided an overview regarding the three constitutive elements

of the concept of “arbitrary or unjustifiable discrimination between countries where the same

conditions prevail” and held the following:125 first, the application of the measure must result

in discrimination; second, the discrimination must be arbitrary or unjustifiable in character,

where ‘arbitrary discrimination,’ ‘unjustifiable discrimination,’ and ‘disguised restrictions’ on

international trade have to be read side-by-side as they impart meaning to one another;126 and

third, this discrimination must occur between countries where the same conditions prevail.127

Disguised Restrictions include but are not limited to disguised discrimination.128

Disguised discrimination can be found in government regulation of product markets which

create regulatory protectionism by increasing the costs of production for firms outside of the

regulating jurisdiction and thereby confer a competitive advantage on domestic firms.129 This

124 GATT Article XX. 125 Autar Krishen Koul, supra note 102, at 313. 126 See id. 127 AB Report on US- Shrimp, supra note 104, para 150. 128 Autar Krishen Koul, supra note 102, at 313. (Disguised Restrictions include disguised discrimination, and

concealed or announced restrictions or discrimination in international trade does not exhaust the meaning of

‘disguised restrictions’ and fall within the domain of restrictions in international trade.) 129 Sykes, supra note 61.

25

practice is not new 130 and proven to be economically inefficient,131 particularly to the exporter.

As described above, there will be different treatment of certification between palm oil, as an

imported product, and rapeseed oil, as a domestic product in the market. The certification will

increase the costs of palm oil production which will become an advantage to the domestic like

products. The Labelling Regulation thus is a disguised discrimination against palm oil

exporters.

One of the way to determine whether a measure is applied in an unjustifiable manner

under the Chapeau of Article XX is by way of assessing whether there has been a serious effort

to negotiate the implementation of the measure with other members who may be affected.132

A study conducted by the UK shows that while the policy of procuring certified sustainable

palm oil will keep costs low to the government, it creates an additional cost to the private sector

that needs to switch from the noncertified palm oil to the certified sustainable palm oil.133 The

increase in cost will be borne mostly by the palm oil exporter that is required to obtain

certification and there has been no official documentation on EU efforts to facilitate

130 AB Report on US- COOL Requirements, supra note 14, para. 239, 240 and 242. (In the COOL Case, US

internal measure imposes an obligation on retailers selling specific products in the US to label those products

with their country of origin including livestock products of beef, pork, cattle and hogs. Meat labelled under

COOL measure may have one or more countries of origin depending on where the production steps took place,

respectively where the livestock born, raised, and slaughtered. In addition, the COOL measure requires

upstream suppliers to provide retailers with information on the origin of the meat supplied, imposes certain

obligations to the manner in which information on origin is to be conveyed to consumers, and imposes

recordkeeping requirements on producers along the livestock and meat production chain as part of its “audit

verification system”.) 131 Sykes, supra note 61. (Regulatory protectionism is economically inefficient, in part for the same reasons that

protectionism of any sort is inefficient. Protectionism draws high cost domestic firms into the market while

excluding low cost foreign firms, and it prices out of the market some consumers who would be willing to

purchase goods at a price exceeding the marginal cost of production of efficient suppliers. [See, for example,

Peter B. Kenen, The International Economy 17-19, 175-77 (Prentice-Hall 1985)] (showing how opening trade

by removing tariffs or quotas will increase consumer surplus in excess of any decrease in producer surplus)

What previous work has not appreciated, however, is that in most cases regulatory protectionism causes

additional deadweight losses that make it considerably more inefficient than other instruments of protection

such as tariffs, quotas, and subsidies. Accordingly, the societal returns to legal constraints on regulatory

protectionism are greater, other things being equal, than the societal returns to constraints on other protectionist

instruments.) 132 Watson, supra note 1, at 207. 133 UK Department for Environment, Food and Rural Affairs, supra note 60.

26

consultation with palm oil exporter prior to the issuance of the Labelling Regulation. The

Labelling Regulation is therefore arbitrary and violates EU obligations under GATT.

IV. Conclusion

The inexistence of a uniform international standard in labelling leads to a different and

diverse ways of how countries interpreted its labelling policy.134 Since the impact of labelling,

as with other technical barriers, is sometimes difficult to measure,135 it could be misused to

protect domestic producers, lead to discrimination and unnecessary barriers, or even worse

serve as a disguised restriction on international trade.136 The WTO provides discipline for this

in the TBT Agreement and Article III: 4 of GATT 1994. 137

The Labelling Regulation violates EU obligation under the TBT and GATT Agreement

by creating a less favourable treatment of the palm oil exporter and benefits the domestic like

products of palm oil. In various recent labelling disputes, the WTO Panel shed new light on

how to approach the less favourable treatment. One of the important considerations of the

WTO Panel is that labelling could have a significant commercial value to a product,138 which

in turn could modify the conditions of competition between foreign and domestic products.139

The fact that the exporter was lacking access to have its product being labelled therefore had a

negative impact on the competition of its products in the importing country, and thus the

134 Sykes, supra note 5, at 10. 135 See id. 136 WTO Environment, supra note 3. 137 Birgitte Egelund Olsen Et Al., supra note 93, at 65. (As prescribed in Article 3.2 of Dispute Settlement

Understanding (DSU), an objective of the dispute settlement system of the WTO is to ‘clarify’ the provisions of

the covered agreements ‘in accordance with customary rules of interpretation of public international law’. This

has consistently been interpreted by Appellate Body as a reference to the ‘general rule of interpretation’ codified

in Articles 31-32 of the Vienna Convention on the Law of the Treaties (Vienna Convention). Under the Vienna

Convention, the interpretation of treaty provisions focuses on the wording, object and purpose of a treaty, as well

as its context. Among the contextual elements the Vienna Convention, Article 31 (3) (c) includes ‘any relevant

rules of international law applicable between the parties’.) 138 Panel Report on US- Tuna II, supra note 22, para. 7.289 - 7.291. 139 AB Report on US-Tuna II, supra note 15, para. 235.

27

labelling created a less favourable treatment.140 The similar concept of less favourable

treatment under Article 2.1 of the TBT Agreement could also be found under the provision of

the Article III:4 of GATT,141 which calls for effective equality of opportunities for imported

products to domestic product in respect of the application of laws affecting their internal

sale.142 Hence as having described above, the Labelling Regulation violates the TBT

Agreement and GATT.

Equally important to the above, the Labelling Regulation is more trade restrictive than

necessary to palm oil exporter. Under the COOL Case, one of the ways to determine the trade

restrictiveness of labelling was by assessing whether the labelling information could fulfil its

legitimate objective, which is to convey the necessary information to the consumers.143 In the

Tuna Dolphin II Case, the WTO Appellate Body assessed that labelling is more trade restrictive

than necessary when the impact of not using the label was not that significant to the fulfillment

of objectives of the regulation requiring the labelling.144 Labelling is more trade restrictive than

necessary when the country issuing the regulation could not provide absolute evidence that the

labelling is essential to achieve its regulatory objectives,145 while, the indirect consequence of

the labelling caused higher compliance costs of imported products.146 Such situation is similar

to the impact of the Labelling Regulation on the palm oil export. The palm oil label does not

provides food consumers an essential nutritional information while the specific labelling of

palm oil is leading to the increasing production cost of palm oil food products. This increasing

costs reduce the competitiveness of palm oil products price in the market and create an

140 See id. 141 AB Report on US- Clove Cigarettes, supra note 15, para. 100 and 175-180; AB Report on US-Tuna II, supra

note 15, para. 214, 215, and 236-239; and AB Report on US COOL Requirements, supra note 14, para. 269. 142 Autar Krishen Koul, supra note 102, at 115. 143 AB Report on US- COOL Requirements, supra note 14, para. 362 and 364. 144 Panel Report on US-Tuna II, supra note 22, para. 7.620 and 8.1 (b). 145 AB Report on US- COOL Requirements, supra note 14, para. 364 146 AB Report on US- COOL Requirements, supra note 14, para. 359.

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advantage to the domestic competitor, rapeseed oil. The Labelling Regulation therefore

violates Article 2.2 of the TBT Agreement.

One might wish to argue that, for the sake of health and environmental protection, it is

possible for the EU to impose the Labelling Regulation on palm oil producers. Article XX of

GATT provides the basis of how to invoke this health and environmental protection defense.

However, it is unlikely that the Labelling Regulation would find its justification based on this

provision. The EU officially admits that there is no substantial evidence on the negative impact

of palm oil to human’s health,147 and, protecting forests is not a primary aim of the Labelling

Regulation.148 Also, the fact that the Labelling Regulation is arbitrary under the Chapeau will

contribute to the inapplicability of Article XX of GATT.149 Hence, EU noncompliance with

the TBT Agreement and GATT cannot be justified under the WTO.

Considering that the EU has created a less favourable treatment and more trade

restrictive measures for palm oil exporters, what can be done to remedy this situation? There

are not many studies conducted that explain how countries could remedy this situation. It is up

to the countries to decide how to formulate WTO obligations in their domestic law. As an

example, following the WTO Appellate Body decision on the Tuna Dolphin II Case, the US

has revised its labelling requirement to accommodate Mexican tuna exporters by way of

requiring the Fisheries Country of Origin (the “FCO”) documentation for the import of tuna.150

Instead of excluding Mexico’s method of fishing from US dolphin safe standard, the FCO

requires tuna exporters and importers to confirm that the product entering the US is dolphin

safe and that no dolphin were killed or seriously injured in the sets where the tuna was caught.

151 US revision of its dolphin safe labelling seems to be a good resolution; however, an

147 European Food Information Council, supra note 30. 148 Commissions Health and Consumer Directorate General Working Group, supra note 122. 149 Autar Krishen Koul, supra note 102, at 313. 150 Department of Commerce, National Oceanic and Atmospheric Administration, 50 C.F.R. § 216 (2013). 151 See id.

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additional reporting documentation like FCO might also create more of an administrative

burden for the importer, exporter, and also to the government. Lesson learned, the WTO must

provide more guidance on labelling implementation to ensure the WTO member countries’

compliance and to prevent any unnecessary labelling dispute in the future.