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NZ-Australia Apples dispute – urgency for a negotiated outcome?

23 April 2010

When the Trans Tasman political newsletter broke the news that the draft WTO report in the New Zealand-Australia Apples dispute favoured New Zealand, it also reported that the New Zealand and Australian governments were searching for a negotiated settlement.  The New Zealand media has been virtually unanimous in calling for such a settlement, contending that a quick deal is necessary to ensure a practical outcome for New Zealand apple exporters.  We examine the facts and suggest that – in the context of an 89 year old dispute – there is no pressing need for New Zealand to rush to compromise what appears to be a strong legal position.

New Zealand media consensus that New Zealand must rush to settle

Following the Trans Tasman’s scoop, commentators rushed to explain why the legal victory was likely to be pyrrhic.  A Dominion Post columnist contended in Fruit decision a victory but agreement better still that:

Put under pressure, the Australian Government would probably appeal.  No appeal of a WTO disputes panel finding has ever been successful, but it doesn’t stop aggrieved parties trying.  It could delay access by another year.  Then, [Australia] could follow Japan’s lead.  Since losing its case with the US seven years ago, and then an appeal, Japan has ingeniously obstructed American efforts to enter the market.  Japan, too, has a small but vigorous apple grower lobby.

The Dominion Post editorial agreed that:

[T]he disputes panel’s ruling does not mean that New Zealand growers can start boxing up braeburns and Pacific roses for delivery to Sydney and Melbourne.  The United States won a similar ruling against Japan seven years ago.  However, its exporters are still having obstacles put in their way. 

The Trans Tasman itself warned ominously that “NZ may have won its case in the WTO court against Australia’s barriers on the sale of NZ apples in the Australian market, but no-one on this side of the Tasman believes the battle has been finally won”.  It explained that Trade Minister Tim Groser would be seeking to find ground for a settlement with Australian counterpart Simon Crean on the sidelines of a Cairns Group meeting in Uruguay this week.

Should New Zealand really rush to settle?

New Zealand would likely also win on appeal

It is not quite correct to say that no WTO panel finding has ever been reversed by the Appellate Body.  In April 2008, for instance, the WTO Appellate Body reversed the appealed aspects of a panel decision against Mexico relating to anti-dumping methodology.  More to the point, selected factual findings and legal conclusions have frequently been reversed, although the ultimate result has usually remained unchanged.  A well-known example is the 2008 EC Hormones case.  There, the Appellate Body disagreed with most aspects of the panel’s analysis of the EC’s ban on hormone-treated beef, but agreed that it was not based on a proper risk assessment and was therefore inconsistent with the WTO Agreement on Sanitary and Phyto-Sanitary Measures (SPS Agreement). 

The SPS Agreement, which relates to WTO member measures applied to protect animal, plant or human life from pests, diseases and contaminants (known as SPS measures), is also at the heart of the NZ-Australia Apples case.  The text of the SPS Agreement, and case law under it, establishes broadly that SPS measures:

  • must be “based on” international standards, guidelines or recommendations, where they exist (Art 3.1, considered in EC – Hormones), and conformity with such standards shall be deemed satisfactory

  • may provide for a higher level of protection than that prescribed by international standards but, if so, must be based on a “scientific justification” or a proper “risk assessment” (Art 3.3).  Such a risk assessment must take into account scientific evidence and have a logical or rational connection with the SPS measure applied (Art 5.2; considered in Japan – Agricultural Products II)

  • must not be more restrictive than necessary to protect human, animal or plant life or health, nor constitute a disguised restriction on international trade (Arts 2.2, 5.5 and 5.6), and

  • should be generally based on scientific principles and not maintained without scientific evidence save where that evidence is insufficient, in which case provisional precautionary measures may be adopted (Arts 2.2 and 5.7).

This gives member states some latitude to determine their own SPS objectives but requires the relationship between those objectives and the measures taken to be justified through a formal scientific risk assessment.  It is only where the science is inconclusive that recourse to a precautionary approach is permitted. 

Australia already has experience of losing an SPS case.  It comprehensively lost against Canada in relation to a ban on importing fresh, chilled or frozen salmon.  In response, Australia changed its federal rules but Canada contended that these changes were inadequate.  In addition, Tasmania imposed its own ban.  Canada therefore constituted a compliance panel to assess Australia’s new measures.  That panel found Australia, despite its new federal measures, and in light of Tasmania’s new ban, was not in compliance.  This is because the new measures were either not based on risk assessments, or were more restrictive than necessary.  This process did not take an inordinate amount of time: Canada called for the first panel to be constituted in March 1997; the compliance panel ruled in February 2000.  In between, the first panel and the Appellate Body both found against Australia.  Since that decision, Canada’s salmon exports to Australia have been significant, with Australia in 2008 becoming Canada’s fourth largest export market.

The US-Japan Apples case followed a similar trajectory.  Like the New Zealand-Australia dispute, the US-Japan dispute concerned measures to prevent infestation of fire blight in apples.  Japan lost before a panel and the Appellate Body, which confirmed that sufficient scientific evidence on the transplant of fire blight existed, so as to preclude use of a precautionary approach.  Japan’s measures were not based on scientific evidence and did not result from a proper risk assessment.  The US then successfully contended, before a compliance panel, that Japan’s subsequent changes to its rules were inadequate.  This process also did not take an inordinate amount of time: the US called for the first panel to be constituted in May 2002; the compliance panel ruled in July 2005.  In between, the first panel and the Appellate Body both found against Japan. 

One month after the compliance panel ruling against Japan, the US and Japan announced a mutually agreed solution to the dispute.  The formal notification of that agreement records the changes Japan committed to make to its internal rules and the US’s satisfaction with those changes.  The US thus withdrew its request for permission to impose “countermeasures” – or retaliatory sanctions – against Japan, as it would otherwise have been entitled to do under WTO rules.  If this was not a good deal for US growers, then they only have the US government to blame. 

Although US apple exports to Japan are still negligible, this may be partly due to commercial reasons rather than trade-restrictive measures taken by Japan.  A 1999 academic article concluded that Japanese consumers had, for a variety of reasons, rejected US apples.  The US Department of Agriculture is presently looking at increasing market access for Japanese apples into the US, which does not tend to indicate that apples remain a major source of US-Japan trade controversy.

New Zealand’s true bargaining power

New Zealand, which was a third party through the US-Japan Apples dispute, was not unjustified in being confident of victory before its own WTO panel against Australia.  It should, one would think, remain confident in any appeal to the Appellate Body.  Its case was, and remains, grounded in: (a) the factual evidence compiled by the New Zealand legal team indicating that Australia’s scientific risk assessments do not justify its total import ban; and (b) extensive similarities between the NZ-Australia Apples case and the US-Japan Apples case. 

So, why the pressure for a quick settlement rather than an outright victory?

The main reason is a belief that the WTO rules and processes are too malleable, such that if Australia loses this case, it can simply erect a different ban to achieve the same end.  There is no doubt a risk of further manoeuvring, but as the Canada-Australia Salmon and US-Japan Apples cases show, New Zealand is more likely to box Australia further into a corner should the dispute proceed further.

Thus, as with commercial litigation, one would think the pressure is on Australia to seek a deal and for New Zealand to scrutinise it hard before signing on the dotted line; not the other way around.  Once New Zealand relinquishes its legal pressure, it will not realistically be able to re-litigate the dispute.  In contrast, there will be further opportunities to settle in the next stages of the WTO process.  Given the Australian ban has been in place for 89 years, it is important the New Zealand negotiators do not act precipitously for the sake of preventing the dispute continuing to a compliance panel stage – which will likely stretch it out only until 2012 or 2013 at the latest.