2.1 WTO's direct control of corporate behaviour

Global value chains vary in their structure, length and overall complexity, but the important uniting feature is that in every chain corporations play a role, either by controlling the overall chain, or by being participants in one or more dimensions of it. This domination by corporations poses a challenge for the WTO rules because at first glance they are predicated on state behaviour and not on that of corporations per se. Article II(1) of the Marrakesh Agreement makes it clear that the WTO rules only apply as between its members. And, only states, or separate customs territories ‘possessing full autonomy’ in the conduct of their external commercial relations, like Hong Kong and Chinese Taipei, for example, are eligible for WTO membership.Footnote ¹⁰ The DSU further reiterates the state-centric nature of the WTO's rules, stating in Article 3(2) that the DSU is designed to provide ‘security and predictability to the multilateral trading system’, but only in a way that ‘serves to preserve the rights and obligations of Members under the covered agreements' (emphasis added). To the extent that corporations control and participate in the exploitation and use of natural resources, their activities would appear to be outside the direct control of WTO rules and its dispute resolution procedure.

Attempts to disguise disputes between large multinational corporations as trade disputes between members have infamously been rejected by WTO panels. Notably, in the Japan-Film dispute, the panel recognised that in fact the dispute concerned the behaviour of the US multinational corporation Kodak, and its Japanese competitor Fuji, and robustly refused to adjudicate on the wider corporate dispute, stating that the WTO was ‘an international agreement in respect of which only national governments and separate customs territories are directly subject to its obligations'.Footnote ¹¹

The panel did go on, however, to acknowledge that it was difficult to draw a bright-line distinction between a ‘pure’ corporate dispute and one where the acts of the corporation were attributable to the state (Japan-Film, 1998, paragraph 1052). ‘Attribution’, in the panel's view, arises when there is ‘sufficient government involvement’ in the activities of the corporation; that is, where there is ‘some connection to, or endorsement of’ the corporation's actions by the state (Moody, Reference Moody2012, pp. 1426–1432). The panel did not flesh out the test further, but indicated that it should be applied on a case-by-case basis. There is little GATT/WTO jurisprudence on the scope of the ‘sufficient government involvement’ test, but in Canada-Dairy, the Appellate Body argued that the actions of non-governmental actors, the Canadian Milk Marketing Boards, could be attributed to Canada partly because the power to act derived from the delegation of authority from the Canadian government and partly because the Milk Marketing Boards performed ‘functions of a “governmental” character’ that were legally enforceable in a court.Footnote ¹² For the Appellate Body, these functions included the right to ‘regulate, restrain, supervise, or control the conduct of private citizens' (Canada-Dairy, 1999, paragraph 97). Although argued in the context of another Annex 1A agreement, the Agreement on Agriculture, the Appellate Body's approach closely follows Article 5 ILC Articles on Responsibility for States for Internationally Wrongful Acts 2001, which makes it clear that ‘[t]he conduct of a person or entity which is not an organ of the State under article 4 but which is empowered by the law of that State to exercise elements of the governmental authority shall be considered an act of the State under international law, provided the person or entity is acting in that capacity in the particular instance’.Footnote ¹³

Even though the connection between the state and the non-governmental bodies was not derived solely from a delegation of power from the state, this test still envisages some form of positive delegation of power from the state to the entity. Framing the test in this way means it is difficult to ‘attribute’ private corporations' activities to states even though those corporations may exercise ‘functions of a governmental character’ (Canada-Dairy; see generally Villalpando, Reference VILLALPANDO2002). This is particularly problematic in buyer-driven global value chains, as the dominant corporation often has specific natural resource exploitation and use guidelines governing the activities of its suppliers. These guidelines can include compulsory minimum environmental and labour standards (Moody, Reference Moody2012, pp. 1430–1432).

For example, following the outcry against Coca-Cola for environmental and labour rights abuses in its sugar cane production in Brazil, together with food safety scares in Europe, Coca-Cola introduced its ‘Supplier's Guiding Principles' (SGPs). The SGPs require all its suppliers, including those supplying natural resources like ‘raw’ sugar cane, to meet eight basic standards, ranging from good workplace practices to robust environmental standards and local labour laws compliance.Footnote ¹⁴ If suppliers do not comply with the SGPs, the agreement with the supplier can be terminated.Footnote ¹⁵ Coca-Cola buys approximately 8 per cent of all sugar produced worldwide from its affiliate suppliers: in Brazil alone Coca-Cola buys 690,000–745,000 tonnes of sugar from over thirty different mills, and accounts for over 7 per cent of all sugar sold in the country (p. 6). As a consequence, the SGPs have significant global as well as domestic reach. Given the potential loss of biodiversity and soil erosion caused by the monocropping of sugar cane, together with harsh labour conditions for those harvesting it, the SGPs should be a positive development, especially as they require local producers to comply with existing labour laws and environmental standards within each state, irrespective of whether the state itself has effective judicial enforcement.

Workers harvesting sugar cane in Brazil for suppliers contracted to Coca-Cola enjoyed significantly improved working conditions following the implementation of the SGPs.Footnote ¹⁶ However, the global reach of such standards means that they have the potential to operate as disguised restrictions on international trade, dependent on how they are administered and applied by Coca-Cola. To the extent that Coca-Cola's actions can be ‘attributed’ to the state rather than to a wholly private actor, the state may be in violation of other Annex 1A WTO Agreements like the Agreement on Technical Barriers to Trade (TBT Agreement).Footnote ¹⁷

The SGPs clearly ‘regulate, restrain, supervise, or control the conduct of private citizens', because they set out appropriate supplier behaviour and include the sanction of termination of supply agreements in the event of violation (SGPs, paragraph 97). But it is difficult to see a positive delegation of authority from ‘the state’ to Coca-Cola, as envisaged by the Appellate Body in Canada-Dairy, simply on the ground that Coca-Cola requires its suppliers to comply with national labour, human rights and environmental laws. Any connection is coincidental and not the positive connection set out in Canada-Dairy, so there would be no liability under the TBT Agreement or the GATT (Canada-Dairy, 1999, paragraph 100).

Even if this hurdle is overcome and a coincidental connection is sufficient, any WTO liability is attributed to the state where the connection is made, rather than to the state where the standard was originally drafted and/or where decisions about modification are made. The state where the connection is made is the one that would bear the cost of rectifying any WTO violation: Article 19(1) DSU requires that once a state is found to be in violation, it is that state which must bring the offending trade measure back into conformity with the rules. Ironically, that state may remain in violation of the WTO rules if it cannot legally require or persuade the corporation to modify its standards. And, as a result of any continued non-compliance, that state is also required to pay compensation to the ‘winning’ state, or, as is more usual under WTO rules, its exports to the winning state will be subject to higher tariffs as a result of the suspension of trade concessions under Article 22(6) DSU.

Given the complexity of a large multinational like Coca-Cola, it may also not be possible to determine a single geographical location for the decision in any event, meaning that it might be difficult to establish liability under the WTO rules at all, as they are predicated on the existence of a measure imposed by, or attributed to, a particular state.

Leaving aside this ‘attribution’ issue, under Articles 3 and 8 TBT Agreement a member is required also to ‘monitor the activities of non-governmental bodies' who are involved in the preparation, adoption and application of ‘technical regulations' and ‘standards’ within its territory. And, in the case of ‘technical regulations’ where compliance with its terms is mandatory (like Coca-Cola's SGPs), to ensure that the technical regulation meets the non-discrimination rules in Article 2.1 TBT Agreement. Technical regulations also must not be ‘prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade’, in Article 2.2.Footnote ¹⁸ Whether wholly private actors like Coca-Cola are the type of ‘non-governmental body’ envisaged by the TBT Agreement is as yet unclear, as there is no jurisprudence on this point; although it seems that after US-Tuna II, the fact that regulations impose standards on the process by which natural resources are extracted, exploited or used, rather than on the products themselves, is no longer a reason for excluding such practices completely from the scope of the TBT Agreement.Footnote ¹⁹

The difficulty with the technical regulations and standards used in global value chains is the complexity of this monitoring requirement, especially as the obligation presumably falls on each member to monitor every ‘non-governmental body’ operating within its jurisdiction. There are at least four main types of global value chain operating in the agri-food sector alone, ranging from buyer-driven chains to bilateral oligopolies and producer-driven chains, as well as traditional markets, and each has its own set of standards, sometimes wholly public, private or a combination of the two (Lee et al., Reference LEE, GEREFFI and BEAUVAIS2012, p. 12327). This complexity makes it difficult to trace, and then monitor, the ‘source’ of the standard and technical regulation in the way assumed by Articles 3 and 8 TBT Agreement, which are designed, like all WTO rules, to address disputes where the source of the harm or problematic measure is readily discernible in a specific geographical space.

2.2 State regulation of natural resources and WTO rules

Natural resources in their unprocessed form, or at a very early stage of processing, play a critical role in the supply chain. For example, extracted oil feeds into every aspect of the chain, from the manufacture of soaps to its use as fuel for homes and transport; likewise, fertile soil is critical for the production of grains or corn for the agri-food global value chain, as they are made into fresh products like bread, sweetener when refined into high-fructose corn syrup, and are a key ingredient in biofuel; rare earths are a key component too in electronics manufacturing, such as mobile phones (China-Rare Earths, 2014, paras. 2.5–2.7).Footnote ²⁰ There is a crucial tension here, as preserving natural resources is an important policy objective for states with the resources. But natural resources are also commonly at the top (or start) of the global supply chain, meaning access to them is critical for the continuing integrity of the chain, especially for the economic and social sustainability of certain aspects of production, which is most likely geographically located in other states. Failure to supply down the chain may cause food shortages in net food importing states, for example like those that occurred in Mozambique and Japan following the poor harvests in Russia and Ukraine in 2008, both of which are large net exporters (Welton, Reference Welton2011).

It is more likely that a state will impose measures designed to maximise trade flow so products move freely into and out of the state, enabling it to gain valuable income from the ‘value’ derived from the fragmentation of production (OECD, WTO and UNCTAD, 2013, p. 7). It may also restrict the levels of environmental harm caused by mineral extraction, for example, or limit the level of soil erosion and biodiversity loss resulting from monoculture. As noted above, the WTO rules were crafted to reduce protectionist barriers to trade and to enable goods and services to move more freely across state borders (Guarin, Reference Guarin2013, p. 3).

For measures that affect imports, the critical issue is whether those measures undermine any tariff (i.e. customs duty) reductions previously negotiated as part of the multilateral trade talks (Cho and Kelly, Reference Cho and Kelly2013, p. 632). Any attempt to undermine the rules using, for example, import bans,Footnote ²¹ prohibitively detailed customs duties (World Economic Forum, 2013, p. 6), or complex rules of origin that favour domestically produced goods over imported ones, must conform with the non-discrimination rules such as the national treatment obligation in Article III GATT, freedom of transit in Article V GATT, and general transparency requirements in Article X GATT, as well as specialist rules governing legitimate health and environmental standards such as the Agreement on Sanitary and Phytosanitary Measures and the TBT Agreement (Cho and Kelly, Reference Cho and Kelly2013, p. 633). It should be noted, however, that in EC-Seals, the Appellate Body indicated, in the context of Articles I and III GATT, that it was enough for the state bringing the action to show that equality of competitive opportunities for ‘like’ products irrespective of their origin were not provided by the importing state, rather than that there was an actual adverse trade effect per se (EC-Seals, 2014, paragraph 5.82).

This pro-market access agenda is good news for developing countries wishing to exploit their comparative advantage in fertile land and good climate in order to export primary produce like fruits and vegetables. Global value chains, dominated by powerful supermarkets like Wal-Mart and Tesco, provide crucial outlets for such products, and income for domestic producers, which contribute to the economic and social sustainability of their production. And, as the notorious ‘ash cloud’ demonstrated in April 2010, albeit in the context of an inability to physically deliver goods from developing countries into key supply chains during the air embargo imposed at the time, the cost to developing countries like Kenya and Tanzania ran to £1.9 m and £250,000 per day, respectively (Jamieson, Reference Jamieson2010). The WTO's market access rules for goods facilitate access further up the value chain, too, for developing countries keen to use the income derived from natural resources exports in order to channel funding into other more lucrative processing points higher up in the chain, for example (UNCTAD, 2013, p. 131). The current Doha Development Round of multilateral trade talks equally grasps the importance of strengthening market access rules by further reducing market access restrictions on agricultural products in particular, as well as moving forwards on the trade facilitation agenda by speeding up the ‘movement, release and clearance of goods’, whether or not in transit along the supply chain (Eliason, Reference Eliason2014).Footnote ²² Removing further supply chain barriers to trade (even if at a rate of only two per country) could add nearly 5 per cent (US$2.6 trillion) to global GDP and 15 per cent (US$1.6 trillion) to global trade (World Economic Forum, 2013, p. 5).

More problematic are the WTO rules' impact on a state's use of import and export restrictions deployed to encourage a global move towards a pro-sustainability agenda. Such measures might be aimed at ameliorating the consequences of dominant corporations' cost reduction strategies that have the potential to cause environmental harm, and the human rights abuses of workers involved in natural resource extraction. A state-imposed measure designed to prevent or restrict imports of minerals or rare earths that have not been exploited in line with clearly defined sustainability criteria, for example, may violate Article XI:1 GATT because it operates as a ‘prohibition or restriction other than duties or taxes made effective through quotas’ on goods.Footnote ²³ Article XI.1 also applies to prohibitions and restrictions on natural resource exports (China-Rare Earths, 2014, paragraphs 7.7.139–7.195 and 7.236–7.362). Two GATT panels, Japan-Semi-Conductors and EEC-Fruit, reiterated this view and found that Article XI:1 applied identically to both imports and exports as both types of measure have the ability to change the conditions of trade between states.Footnote ²⁴ Such measures can be found to violate Article XI:1 even though they are not overt export measures, but rather operate in a de facto way to restrict exports.Footnote ²⁵

Article XI:2(a) GATT allows states to impose export restrictions ‘temporarily’ to either ‘prevent or relieve critical shortages of foodstuffs or other products essential to the exporting party’; the latter, for the purposes of this discussion, includes natural resources like minerals and rare earths; or, under Article XI:2(b), if such restrictions are ‘necessary to the application of standards or regulations for the classification, grading or marketing of commodities in international trade’. Article XI:2(a) and (b)'s protection only stretches to an escape from sanctions, and the state cannot impose the restrictions in a discriminatory manner (Article XIII:1 GATT). In China-Raw Materials, the Appellate Body found that a measure is ‘temporarily applied’ for the purposes of Article XI:2(a) when it is an interim measure imposed for a limited period to ‘bridge a passing need’ (China-Rare Earths, 2013, paragraph 323). In contrast to the panel, the Appellate Body argued there should be a link between the measure's duration, the nature of the ‘critical shortage’, and the temporary nature of the measure. This means that the measure need not be of fixed duration on its face, but that it must be clearly apparent that the measure will only be in place for the duration of the ‘critical shortage’. This would both mark the measure out as an interim measure and also fix the period of time in a slightly different way from that envisaged by the panel. So once the ‘critical shortage’ ends, the measure must also be removed.

The Appellate Body found that a ‘critical shortage’ refers to ‘those deficiencies in quantity that are crucial, that amount to a situation of decisive importance, or that reach a vitally important or decisive stage, or turning point’ (China-Raw Materials, 2012, paragraph 324).Footnote ²⁶ A measure will be deemed to ‘relieve’ a ‘critical shortage’ when it ‘[r]aises out of some trouble, difficulty or danger, bring[s] or provide[s] aid or assistance to’ the situation; that is, when the measure brings some form of relief to the particular crisis experienced by the state, stops the problem escalating, or merely acts to pre-empt the ‘critical shortage’ (paragraph 327). The Appellate Body finally suggested that whether the shortage was in fact ‘critical’ would depend on the ‘essential’ nature of the product: that is, how important the product was to the state's economy and citizens both emotionally and financially. The characteristics of the product would also inform how long the measure would need to be in place to ‘relieve’ the ‘critical shortage’ (paragraph 328).Footnote ²⁷

This interpretation means it is difficult for a state to bring a ban on the export of natural resources within the scope of Article XI:2(a) for several reasons. First, the only ‘critical shortage’ of an ‘essential’ product the Appellate Body seemed willing to sanction was a food shortage, rather than a general concern that a state rich in minerals may wish to slow their extraction on sustainability grounds (China-Raw Materials, 2012, paragraph 337). Long-term preservation measures designed to limit exports to sustainable levels must instead fall within the scope of the general exceptions to the rules on goods contained in Article XX GATT, explored further below (paragraph 333). The Appellate Body specifically rejected China's argument that imposing export restrictions over ten years was actually designed to prevent the critical decline of mineral resources. For the Appellate Body, this was neither a temporary measure nor a response to a critical shortage, which it thought should be something much more imminent than a potential decline over ten years (paragraph 337). Such a finding suggests that it must be possible to identify a ‘tipping point’ after which point natural resource depletion is so advanced as to justify an export ban. In one sense, it is ironic that the fundamental objective of sustainably managing natural resources using a multiplicity of measures is that stocks never decline to such low levels. But it should be noted that export restrictions severely disrupt the functioning of global value chains, so pushing China to consider other less disruptive measures in fact maximises the ‘value added’ China (and all the participants) can earn from allowing Chinese natural resources to be used in the chain.

Import restrictions on natural resources imposed on sustainability grounds may also mean that the state violates the national treatment rules in Article III:4 GATT, as WTO dispute settlement panels do not permit states to impose different market access treatment on products simply on the ground of the way they were produced; this is the so-called product–process problem (PPM).Footnote ²⁸ In the latter case, even though the imported products were processed using non-environmentally friendly methods, or violated labour rights, this product would still be deemed to be ‘like’ the domestic product that was not produced using that method. This severely hampers the state's flexibility in terms of its response to unsustainable production techniques by dominant corporations at the head of the supply chain, unless they can justify their measures under one of the exceptions to the GATT rules.Footnote ²⁹ It should be noted that there is more flexibility on the PPM issue when compulsory standards are used in conformity with the TBT Agreement following US-Tuna II, rather than an import ban, although full discussion on the issue is yet to come before WTO dispute settlement proceedings. The Appellate Body neatly sidestepped the issue in EC-Seals, arguing that PPMs raised ‘important systemic issues’ that were not fully argued before the panel, nor discussed in its report. As such, the Appellate Body felt it could not ‘complete the analysis’ left open by the panel, as to do so risked ‘the parties’ due process rights' (EC-Seals, 2014, paragraph 5.69).Footnote ³⁰

It is clear from panel and Appellate Body jurisprudence, that measures that limit market access in order to preserve the health of citizens in a state during mineral extraction, or to protect against biodiversity loss, or to limit damage to the environment, can be justified if they fall within the general exceptions to the WTO rules on trade in goods, specifically the exceptions found in Article XX(b) and Article XX(g) GATT.Footnote ³¹ The Appellate Body has made it clear that members can impose their own level of protection within their territory, for it is not imposing a particular policy objective that is problematic per se, but rather the measure used by the member to achieve the requisite level of protection.Footnote ³²

In China-Rare Earths, China argued before the panel that the mining and extraction of Chinese rare earths caused grave harm to China's environment, and as a direct consequence harmed human, animal or plant life or health (China-Rare Earths, 2014, paragraph 7.149). China justified its use of export duties on rare earths on the basis of Article XX(b) GATT. It argued that the rare earth extraction process created large reservoir water pools containing toxic and radioactive substances which, if not sufficiently secure, could seep into main watercourses with consequential threats to human, animal or plant life or health (paragraphs 7.51–7.153). Airborne toxin release was also likely. China showed that the health risks were so well known by other states that rare earth extraction no longer took place outside China. This made China the main source of rare earths for the manufacture of key components in mobile phones and microchips, and, as such, put even greater pressure on its remaining natural resources (paragraph 7.154). The knock-on effect of China's export duties and export restrictions, however, was to severely impede inputs into the top of technology global value chains and to restrict the amount of other electronic components necessary for other global value chains.

Despite China's pro-sustainability policy objective, the panel argued that China's export duties were not ‘necessary to protect human, animal, or plant life or health’ under the exemption contained in Article XX(b) GATT. The panel noted that the WTO rules aim to strike the appropriate balance between trade liberalisation and allocating sufficient policy space to members so they can pursue non-trade objectives such as the preservation of the environment and the protection of human health (China-Rare Earths, 2014, paragraph 7.160). As the Appellate Body later noted in EC-Seals, this means that not every aspect of a measure will be considered under the general exceptions in Article XX GATT, but only those aspects that give rise to the finding of inconsistency with the GATT rules (EC-Seals, 2014, paragraph 5.185). This means that key pro-sustainability aspects of a measure may li e outside the scope of the WTO completely.

For the panel in China-Rare Earths, however, it was not enough for members to merely state that the measures were ‘necessary to protect human, animal or plant life or health’ in policy documents, they must provide ‘persuasive evidence of a connection between environmental protection standards and export restrictions’ (China-Rare Earths, 2014, paragraph 7.165, emphasis added). In other words, a member wishing to justify measures that restrict trade between states must explain how the measures operate so as to reduce pollution caused by their extraction or production (China-Rare Earths, 2014, paragraph 7.166; China-Raw Materials, 2012, paragraph 7.508). This explanation could show how the measure indirectly contributed to the pollution reduction, but it must ‘consist of quantitative projections in the future, or qualitative reasoning based on a set of hypotheses that are tested and supported by sufficient evidence’ (China-Rare Earths, 2014, paragraph 7.173, emphasis added).Footnote ³³ Although not at issue in the EC-Seals case, as that case turned on the ‘public morality’ exception in Article XX(a) GATT not Article XX(b), the Appellate Body stated that, unlike Article XX(a), the focus on danger and risks to public, animal, plant life or health meant Article XX(b) lends itself to ‘scientific or other methods of enquiry, such as a risk assessment’ to determine whether the measure at issue was ‘necessary to protect’ the dangers and risks at issue (EC-Seals, Appellate Body, paragraph 5.198). China failed to show this in the Rare-Earths dispute. Instead, there was evidence that the measure favoured domestic production by allowing local producers to capture the ‘value’ from feeding the natural resources into the value chain (China-Rare Earths, 2014, paragraph 7.169). The panel also noted that even though China was already using less trade restrictive measures to protect its environment, including a deposit scheme from the mines to support ecological recovery, increasing the levels of such measures was a ‘reasonably available alternative’ to export duties that significantly impacted on international trade in rare earths (China-Rare Earths, 2014, paragraph 7.186; confirmed in EC-Seals, 2014, paragraphs 5.261–5.264).

China also sought to justify its export quotas on the basis of Article XX(g) GATT: it argued the quotas related to the ‘conservation of an exhaustible natural resource’, as they were ‘made effective in conjunction with restrictions on domestic production or consumption’. In US-Shrimp, the Appellate Body stated that the meaning of ‘exhaustible natural resource’ in Article XX(g) must evolve over time, taking into consideration contemporary concerns about ‘sustainable development’ (US-Shrimp, 1998, p. 128). In China-Rare Earths, the parties disagreed over whether rare earths were ‘natural resources’ and, even if they were, whether they were ‘exhaustible’.

The EU, Japan and the US argued that ‘natural resources’ should be limited to those resources only in their raw, rather than semi-processed or processed, form (China-Rare Earths, 2014, paragraph 7.246). Such a view suggests that primary products like grains are excluded from the definition. China did not express a view on the precise definition, but argued it should be interpreted broadly (paragraph 7.250). The panel neatly sidestepped the issue, stating instead that, provided the measure had as its object the direct or indirect conservation of the natural resource, it did not matter that the ‘resource in its raw form is not the direct subject matter of the measure’ (paragraph 7.247; and on Article XX(g) GATT, paragraphs 7.282–7.337). Although the panel found it unnecessary to define the terms to resolve the dispute, it argued that only those ‘natural resources’ that were ‘exhaustible’ could be covered, and that the term did not extend to all raw materials (paragraph 7.248). Interestingly, it did go on to comment that the Appellate Body in US-Shrimp had not been required to determine at what precise point processed raw materials cease to be ‘exhaustible natural resources’ for the purposes of Article XX(g) GATT, so this issue remains open. This point was not revisited by the Appellate Body on appeal.

In China-Raw Materials the panel acknowledged that a state could impose a measure that kept the natural resource from ‘harm, loss, or waste’, but it did not go on to elaborate whether retaining quantities of the resource for release into a global value chain at a later date was enough for the resource to be regarded as ‘conserved’ for the purposes of exemption under Article XX(g). There seemed to be some concern among the parties to the dispute that retaining natural resources in this way artificially inflated prices and, as such, should not be regarded as a legitimate conservation measure (China-Raw Materials, 2012, paragraphs 7.372–7.386; China-Rare Earths, 2014, paragraph 7.256). The Appellate Body did not discuss this point.

The panel in China-Rare Earths took a more expansive view, interpreting the meaning of ‘conservation’ in the broader context of sustainable development. It argued that a moratorium on mineral extraction to slow the rate of use could be a conservation measure for the purpose of Article XX(g) in principle, if it was imposed ‘in accordance with a Member's development and conservation objectives’ including economic objectives to address their development needs (China-Rare Earths, 2014, paragraphs 7.266–7.267). However, the panel did usefully point out that this interpretation did not mean that a state had a licence to interfere indiscriminately in the supply chain, stating instead that ‘no WTO member has, under WTO law, the right to dictate or control the allocation or distribution of rare earth resources to achieve an economic objective. WTO Members’ right to adopt conservation programmes is not a right to control international markets in which the extracted products are bought and sold’ (paragraph 7.268).

More problematic are measures adopted by states to guarantee minimum labour standards. Within the trade community, the conventional view is that trade measures designed to protect labour rights fall outside the scope of the WTO exceptions. Some commentators argue, however, that such measures should fall within the scope of Article XX(b) as ‘necessary to protect human, animal or plant life or health”, or within Article XX(a) as ‘necessary to protect public morals’ (Howse, Reference Howse1999). In both, the state must show that the measure is ‘necessary’; in other words, that it is the ‘least trade restrictive’ measure available, and that another measure would not equally meet the requirements. The measure's necessity is therefore determined against the state's regulatory objective (China-Rare Earths, 2014, paragraphs 7.139–7.148). It should also be noted that the narrower the scope of the regulatory objective, the less likely the WTO panel will find a ‘reasonably available alternative measure’ that will address the concern (China-Publications and Audiovisual Products, 2009, paragraph 251).Footnote ³⁴

Whilst the panel and Appellate Body jurisprudence under Article XX GATT (and Article XIV GATS) indicates an increased cognisance of the state's right to regulate and an openness to find that measures designed to promote economic, social and environmental sustainability are within the list of exceptions, the same flexibility is not true for the non-discrimination test of Article XX GATT (and XIV GATS)'s chapeau, which the Appellate Body regards as a ‘limited and conditional exception from the substantive obligations’ in the GATT and GATS (US-Shrimp, 1998, paragraph 1173). Rather, the chapeau's function is to ‘maintain the equilibrium between obligations under the GATT … and the exceptions provided under each subparagraph of Article XX’ (EC-Seals, 2014, paragraph 5.301). For the Appellate Body in US-Reformulated Gasoline, the key to determining liability is interrogating the ‘manner in which that measure is applied’ (US-Reformulated Gasoline, 1996, paragraph 1166). So, the measure must not be ‘applied in a manner which would constitute an arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade’ (EC-Seals, 2014, paragraphs 5.301–5.303, emphasis added). For a measure to satisfy the chapeau, it: (i) must not result in discrimination; (ii) the discrimination must not be arbitrary or unjustifiable ‘in character’; and (iii) the discrimination must not occur between countries where the same conditions prevail (US-Shrimp, 1998, paragraphs 1178–1179).

The Appellate Body has found ‘arbitrary and unjustifiable discrimination’ in a number of cases, which are very instructive for this account of natural resources, global value chains and sustainable development. For example, in US-Shrimp, the Appellate Body was concerned that the US measure imposing an import ban on shrimp and shrimp products harvested by foreign ships using particular techniques violated this requirement of the chapeau because the measure had ‘the intended and actual coercive effect on other governments [to] adopt essentially the same policy’ as the US (US-Shrimp, 1998, paragraph 1187, emphasis added). In that case, the Appellate Body felt that such unilateralism was unjustified because it imposed a single homogenous standard on all states irrespective of those states’ domestic situations (China-Rare Earths, 2014, paragraphs 7.353, 7.356–357).

Indeed, as the panel pointed out in China-Rare Earths, the aim of Article XX is not to equalise the market conditions for all states, but rather to maintain the existing market disparities between them (China-Rare Earths, 2014, paragraph 7.360).Footnote ³⁵ Pro-environmental measures can be imposed, but only to the extent that they do not interfere with domestic private actors' activities any more than is necessary. The state should interfere as little as possible with private actors’ competitive opportunities therefore, and, as a corollary, it can be assumed that a state will fail to satisfy the requirement of the chapeau if it uses trade measures that interfere too readily in the operation of complex global value chains.

As this discussion previously showed, at first glance the WTO rules are an excellent way of controlling the extraction and use of natural resources by corporations acting through global value chains. Yet the reality is more problematic: it is uncertain whether there are ever instances where the rules will impact on the corporation directly; and the rules severely curtail the state's ability to use trade measures, like import and export quotas for example, to force large dominant corporations controlling the chain to extract and exploit natural resources in a more sustainable way. Although Article XX GATT provides limited exceptions to the rules in specific circumstances, these exceptions create further difficulties when their application is understood in the light of corporate dominance of natural resource extraction and use in global value chains.

Notably, the length and complexity of some global value chains, especially those of supermarkets like Wal-Mart, means that a pro-sustainability tax or import restriction imposed by a state affects production at various geographical points along the chain. Inevitably, this will affect suppliers in other countries, as the tasks along the chain mean production is increasingly fragmented. Whilst the Appellate Body recognised the possibility of the extra-territorial scope of some trade measures in the context of its interpretation of Article XX(a) GATT (the public morality exception) in EC-Seals, it decided not to rule on the extra-territoriality issue as the parties had not raised it in argument (EC-Seals, 2014, paragraph 5.173). This issue still remains open.

In buyer-driven global value chains, the dominant corporation often imposes a single set of standards down the chain. As noted above, Heinz insists on one variety of tomatoes grown according to strict production methods. (Lee et al., 2012, p. 12429). Irrespective of the Appellate Body's stated desire to protect the disparate market ‘conditions within the states’, in reality the corporation's insistence on one set of standards throughout the global value chain means that the market conditions in each state may be more homogenous than the Appellate Body's report indicates. The reality is that whilst the GATT appears to give states flexibility to address sustainability issues through the exceptions, in fact import restrictions become increasingly difficult to justify under Article XX due to the contemporary reality of global value chains.