1. The Measure at Issue

The EC raised, on appeal, concerns about the Panel's decision to treat the import ban on retreaded tyres and the MERCOSUR exemption as separate measures. It argued that both measures were in fact part of a single measure, Article 40 Portaria SECEX 14/2004, which was the measure at issue. However, it did not appeal the Panel's analytical approach to treat the measures separately. The Appellate Body favoured the approach advocated by the EC to characterize the measure at issue as a single one, though with different aspects. The Appellate Body was not inclined, however, to reverse the Panel's approach as the matter was not appealed. It added that the Panel's approach could be explained on the basis of the structure of the EC's claim and the introduction of the exemption subsequent to the adoption of the import ban on retreaded tyres and to comply with the ruling of a MERCOSUR arbitral tribunal. As a result, the Appellate Body proceeded to examine the import ban on retreaded tyres and the MERCOSUR exemption as separate measures.Footnote ¹ Although the appeal was narrowly focused on these two measures, the Appellate Body still identified and took into consideration related measures, which were adopted as part of Brazil's comprehensive strategy to reduce risks to human, animal, and plant life and health associated with the accumulation of waste tyres, including sanctions applicable to harmful conduct to the environment, collection and disposal schemes, the exemption from disposal obligations applicable to domestic retreaded tyres and State measures aimed at reducing risks resulting from the waste tyres' accumulation.

2. Article XX(b) GATT 1994—The Necessity Analysis

Necessity is a relative concept; its analysis requires weighing and balancing the measure against the stated objective. The identification of the objective of the measure is thus a crucial preliminary step in this process. The Panel had weighed the import ban on retreaded tyres against Brazil's objective to reduce, to the maximum extent possible, exposure to risks to human, animal and plant life and health arising from the accumulation of waste tyres, and found that this relationship was one falling under Article XX(b) GATT 1994. The objective of the measure was, directly, waste reduction and, indirectly, the reduction of exposure to particular risks. The logic followed by the Panel was that an import ban on retreaded tyres would result in waste reduction of used retreaded tyres in Brazil, which, in turn, reduces the risks to human, animal and plant life and health. An import ban on retreaded tyres was more likely to achieve such objective than a ban on imported new tyres because retreaded tyres have a shorter life span than new tyres and, consequently, more quickly and easily result in waste. It is necessary to observe at this point that the Panel's comparison in fact says little about the amount of waste, but rather reflects on the period over which waste is generated: retreaded tyres result more quickly in waste, which potentially leads to more waste. This highlights the importance of defining the period over which to assess the necessity of the measure. The preventive measure of banning imports of retreaded tyres was also preferred above a sales ban of domestically retreaded tyres. Here, the Panel evaluated the comparison over a short time-frame, assuming that domestic retreading of tyres was a remedial measure, as used tyres were recycled into retreaded tyres rather than resulting in waste. Ultimately, such domestic retreaded tyres will also become waste, and as quickly as imported retreaded tyres. The Panel assumed that the import ban on retreaded tyres would motivate domestic retreaders to retread more tyres. But motivation is not the same as causation.

The Appellate Body started its analysis of whether the measures at issue were ‘necessary’ within the meaning of Article XX(b) GATT 1994 with a reaffirmation of the basic principle that the WTO covered agreements accept and respect the policy space within which its Members can set their own environmental objectives and level of protection, and regulate accordingly.Footnote ² This is the underlying rationale of Article XX GATT 1994. The basic principle applies as long as the WTO Member acts in good faith and regulates within its policy space consistently with the principle of non-discrimination. Before scrutinizing the measures at issue, the Appellate Body reiterated its previous case law on the meaning of ‘necessary’ in Article XX(b). It explained in Korea–Measures on Beef that the meaning of ‘necessary’ can vary. The meaning of ‘necessary’ fluctuates between the extremes of ‘indispensable’ and ‘making a contribution to’. ‘Necessary’ could only mean ‘indispensable’ if it had been preceded by the word ‘absolute’. In Korea–Measures on Beef, the Appellate Body equally explained how every application of the meaning of the word ‘necessary’ would entail a process of weighing and balancing and it provided a non-exhaustive list of relevant factors that could influence this process, including the importance of common interests and the accompanying impact of the measure at issue on imports and exports.Footnote ³ ‘Necessary’ is thus a fluid legal standard; its general meaning is more predictable than its application to a particular measure, as the discussion in the following section illustrates.

The first step in the Appellate Body's application of Article XX(b) was to identify the objective of the import ban on retreaded tyres. It agreed with the Panel's description of this objective. Similarly, it did not distinguish between the direct and indirect objective. Next, it scrutinized the Panel's methodology in analysing the contribution of the import ban to the objective of the measure. The Appellate Body accepted that the Panel, as the trier of fact, enjoys a particular discretion to choose the applicable methodology. This discretion was only curtailed by Article 11 DSU, according to which a panel is to make ‘an objective assessment of the facts’. Accordingly, the Appellate Body accepted the Panel's chosen methodology to examine ‘the genuine relationship of ends and means between the objective pursued and the measure at issue’, which depended on a series of factors, including the function of the nature of the risk, the objective pursued and the level of protection sought, as well as the nature, quantity and quality of the evidence existing at the time of the analysis. In doing so, the Panel had also chosen to qualify rather than quantify the risk. The Appellate Body was brief in accepting this as a satisfactory and coherent analysis. There was little or no discussion in the Appellate Body's report of how this chosen methodology affected the scope of the Panel's scrutiny of the defendant's regulatory and legislative choices in justifying measures under Article XX. So far, the Appellate Body's reasoning on this point affirms that the principles established in Korea—Measures on Beef continue to apply, but may allow more deference—in particular cases—to the defendant than originally thought when the Appellate Body articulated the legal framework within which to appreciate justifications on the basis of Article XX(b). These preliminary observations and conclusions relating to the division of powers between panels and the Appellate Body were followed by an examination of whether the import ban on retreaded tyres was ‘necessary’ within the meaning of Article XX(b) GATT 1994.

The Appellate Body decided that even the most trade-restrictive measure, such as an import ban, could be a necessary one. The application of the meaning of ‘necessary’ fluctuates depending on the objective pursued but equally on the character of the measure at issue. The Appellate Body reasoned that an import ban cannot be necessary ‘unless it is satisfied that the measure is apt to make a material contribution to the achievement of its objective’ and a marginal or insignificant contribution would be insufficient.Footnote ⁴ A contribution exists, as the Appellate Body explained in its general conclusions on the necessity analysis, ‘when there is a genuine relationship of ends and means between the objective pursued and the measure at issue’.Footnote ⁵ In addition, this contribution must be ‘material’ and must be weighed against the measure's trade restrictiveness.Footnote ⁶ Defined negatively, ‘material’ does not mean ‘marginal’ or ‘insignificant’. Notably, the Appellate Body's negative definition of ‘material’ did not distinguish between import bans, as the most trade-restrictive measures, and other measures. Equally, the Appellate Body noted it is not required that the contribution is ‘immediately observable’ to meet the standard of ‘material’.Footnote ⁷ In other words, not solely single measures considered in isolation can materially contribute to the stated objective. Sometimes, a single measure will be insufficient and only a more ‘comprehensive policy comprising a multiplicity of interacting measures’ is capable of materially contributing to the stated objective. The test of ‘material contribution’ is one of how a measure contributes to the objective. A separate matter is which measures contribute to the objective at issue. The Appellate Body merged both questions into one and found that they cannot be separated in particular cases. Others measures than the ‘measure at issue’ can thus still become relevant provided they are part of a comprehensive policy designed to tackle a common objective. According to this reasoning, the jurisdiction of the Appellate Body may be limited to ‘the measures at issue’ in the appeal, but it appears that this jurisdiction could implicitly be extended depending on the claims and the character of such measure(s).

The Appellate Body accepted the Panel's hypothesis that the import ban would result, directly, in less wasted tyres and, indirectly, in reducing risk exposure associated with such waste. The alleged logic behind this hypothesis is that the demand for imported retreaded tyres would be replaced by an increasing demand for domestic retreaded tyres as a result of the import ban. New tyres, whether imported or domestically produced, can either have only one life and become waste, or can be retreaded to have a second life. In the short term, waste reduction is achieved by retreading used tyres. In the long term, these retreaded tyres will also become waste and will do so more quickly than new tyres. Brazil intended to reduce such waste through the import ban and a set of other related measures. As a result of the ban, imported new tyres, domestically produced new tyres and domestically retreaded tyres could meet the demand for tyres in Brazil. Brazil claimed, and the Panel agreed, that the measure would increase the demand for domestically retreaded tyres and a higher production of such tyres would result in waste reduction, at least in the short term. This was the qualitative hypothesis on which the Panel's findings were based. The Appellate Body accepted this hypothesis, though noting that a quantitative analysis, providing estimates of such waste reduction and its time span, would have ‘strengthened the foundation of the Panel's findings’.Footnote ⁸ The Appellate Body did not consider whether such quantitative analysis could also prove the opposite, that is, that the import ban could result in an increased demand for imported and domestically produced new tyres. It only considered the domestic demand for retreaded tyres in Brazil and accepted, in response to the EC's claim on the basis of Article 11 DSU, that the Panel accurately and sufficiently assessed the evidence. Similarly to the Panel, the Appellate Body preferred not to examine the import ban in isolation to make a finding on the ban's necessity. It agreed with the Panel that the import ban was only one part of a more comprehensive strategy designed and implemented to achieve waste reduction, including an import ban on used tyres and a collection and disposal scheme.Footnote ⁹

The next step in the analysis is to seek confirmation of the preliminary conclusion that the import ban is necessary within the meaning of Article XX(b) GATT 1994 by ‘comparing the measure with its possible alternatives, which may be less trade restrictive, while providing an equivalent contribution to the achievement of the objective pursued’.Footnote ¹⁰ The Appellate Body previously held in US—Gambling that an alternative measure is one that ‘preserve[s] for the responding Member its right to achieve its desired level of protection with respect to the objective pursued’.Footnote ¹¹ The burden of proof for this confirmation lies with the complainant. It is not for the respondent to establish that there are no reasonably available measures to achieve the stated objectives.Footnote ¹² But the respondent may argue that the measure is not a genuine alternative one capable of achieving the stated objective or is not reasonably available.Footnote ¹³ An alternative measure, advanced by the complainant, is not ‘reasonably available’ if ‘it is merely theoretical in nature, for instance, where the responding Member is capable of taking it, or where the measure imposes an undue burden on that Member’.Footnote ¹⁴ The EC proposed two types of alternative measures: measures to reduce the number of waste tyres and measures or practices to improve waste management. The Panel found that measures aimed at reducing the number of waste tyres by encouraging domestic retreading and improving the retreadability of domestic used tyres were already part of Brazil's comprehensive strategy. As a result, such were not alternative measures because they did not ‘substitute’ the import ban. They were simply complementary to the other measures implemented or being implemented by Brazil. The EC also proposed measures intended to improve management of waste tyres, such as particular schemes to collect and dispose of used tyres. The Panel adopted a similar approach as in relation to the first type of alternative measures advanced by the EC. But it also recalled the objective of Brazil's comprehensive strategy, which was ‘the reduction of the risks associated with waste tyre accumulation to the maximum extent possible’. This was, indeed, the indirect objective. Previously the Panel had analysed the measure on the assumption that the direct objective was waste reduction. In examining this second type of alternative measures, however, the Panel appeared to introduce a third objective of the measure, which was to eliminate waste tyres. Consequently, collection and disposal schemes generally could not result in the same level of protection as the import ban. Equally, not all such collection and disposal schemes contributed to the indirect objective of reducing exposure to particular risks to public health and the environment; and the implementation of some of these schemes, such as incineration, carry their own risks. Brazil's comprehensive strategy already included such schemes. On appeal, the EC argued that the Panel used an incorrect concept of ‘alternative’ measures, and that it should have considered measures that could improve the enforcement of Brazil's comprehensive strategy. In particular, the EC pointed to the discrepancy in the Panel's description of the objective of Brazil's measure. While the preliminary conclusion that the measure was necessary was based on the direct objective of waste reduction and indirectly reduction of risk exposure, the Panel examined whether there were alternative measures on the assumption that the objective was waste prevention or the non-generation of waste tyres.

The Appellate Body started its examination of the EC's claim by identifying the objective of the import ban. It agreed with the Panel that the objective was to reduce the ‘exposure to the risks to human, animal or plant life or health arising from the accumulation of waste tyres’ and ‘to the maximum extent possible’.Footnote ¹⁵ The Appellate Body thus focused on the indirect objective of Brazil's measure; it was silent on whether the direct objective was waste reduction or waste avoidance. The Appellate Body did not criticize the Panel's indecisiveness in identifying the stated objective. It took a different approach, by stating that ‘non-generation measures are more apt to achieve this objective’ than waste-management measures, and consequently it upheld the Panel's decision on whether ‘alternative’ measures were available.Footnote ¹⁶ Remedial measures proposed by the EC were complementary to the import ban and ‘constitute[d] mutually supportive elements of a comprehensive policy to deal with waste tyres’; they were not alternatives to the measure at issue.Footnote ¹⁷

The Appellate Body was also asked to consider whether the Panel had, correctly, engaged in a weighing-and-balancing exercise of the relevant factors. The EC claimed that this was not the case because the Panel had failed to engage in a ‘process where, in the first place, the importance of each element is assessed individually and, then, its role and relative importance is taken into consideration together with the other elements for the purposes of deciding whether the challenged measure is necessary to attain the objective pursued’.Footnote ¹⁸ Overall, the EC criticized the Panel for conducting a ‘superficial analysis’ and for failing to balance ‘its arguments about the measure and the alternatives with the absolute trade-restrictiveness of the import ban and with a real evaluation of the contribution of the import ban to the objective pursued’.Footnote ¹⁹ The Appellate Body responded to the EC's claim by explaining the three steps in the process of assessing the necessity of a measure under Article XX(b) GATT 1994: (1) a preliminary conclusion based on relevant factors such as the importance of the interests or values at stake, the extent of the contribution to the achievement of the objective and a measure's trade restrictiveness; (2) seeking confirmation of this conclusion in examining whether reasonably available less trade-restrictive alternative measures exist providing an equivalent contribution to the achievement of the objective; and (3) comparing the measure at issue with reasonably available alternative measures in the light of the importance of the interests or values at stake.Footnote ²⁰ The Appellate Body rejected the EC's claim and found that the Panel followed a process of weighing and balancing all relevant factors. It described, for the first time, this process as ‘a holistic operation that involves putting all the variables of the equation together and evaluating them in relation to each other having examined them individually, in order to reach an overall judgment’.Footnote ²¹ This is an attractive definition in theory, but its generality obscures what the process entails in practice. The Appellate Body's analysis shows that the roadmap set out in US—Gambling still stands, but was not applied in this particular case.

3. The MERCOSUR Exemption: Article XX GATT 1994—The Chapeau

The second issue raised on appeal was whether the Panel had erred in interpreting and applying the chapeau of Article XX GATT 1994. Once a measure is found to qualify under one of the paragraphs of Article XX GATT 1994, it is provisionally justified. The next step in the two-prong test is to examine whether the provisionally justified measure complies with the requirements of the chapeau. Overall, the chapeau reflects the general principle of good faith application of international law and the corollary doctrine of abus de droit; in particular it aims to ensure that Members rely on the exceptions in Article XX ‘in good faith to protect interests considered legitimate under Article XX, not as a means to circumvent [their] obligations towards other WTO Members’.Footnote ²² It is thus a test of how, and not why, a measure is applied. The EC claimed that the Panel had erred in finding that the MERCOSUR exemption, adopted in response to a finding of a MERCOSUR tribunal, did not result in the import ban being applied in a manner inconsistent with the chapeau.

The chapeau of Article XX GATT 1994 sets out two requirements relating to the application of GATT 1994-inconsistent measures that have passed the hurdle of one of the paragraphs of Article XX.Footnote ²³ The first requirement is that the provisionally justified measure is ‘not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail’. The Panel found that the MERCOSUR exemption complied with this requirement. It advanced two reasons for this conclusion. The MERCOSUR exemption was not part of the original measure, but was adopted to comply with the decision of a MERCOSUR arbitral tribunal finding that the original measure introduced a new restriction on trade between Brazil and its MERCOSUR trading partners that is prohibited under MERCOSUR. The exemption was thus adopted to comply with Brazil's obligations under another treaty framework as interpreted and applied in a legally binding decision of a tribunal established under that other treaty. A decision of, in casu, a regional tribunal was a ‘reasonable basis’ for adopting the exemption, and consequently the discrimination resulting from the exemption was ‘not arbitrary’.Footnote ²⁴ The Panel found, therefore, that the exemption was not ‘motivated by capricious or unpredictable reasons’.Footnote ²⁵ The MERCOSUR exemption was also not ‘a priori unreasonable’ because the GATT 1994 itself accepts in Article XXIV that WTO Members may treat certain other Members more preferentially than others, subject to particular conditions.Footnote ²⁶ The Panel was careful, though, to limit its finding in the sense that it was not suggesting that ‘the invocation of any international agreement would be sufficient under any circumstances’ to meet the test of the chapeau in Article XX GATT 1994.Footnote ²⁷ In other words, if Brazil had solely relied on Article XXIV GATT 1994 this would have been insufficient. It was critical, in the eyes of the Panel, that the measure at issue was adopted in compliance with a legally binding decision of a regional tribunal applying and interpreting a regional trade agreement in a particular case. Even then, this is not a general principle and the Panel explained that such justification would be unsatisfactory if the imports of retreaded tyres from Brazil's MERCOSUR trading partners were affected ‘in such amounts that the achievement of the objective of the measure at issue would be significantly undermined’. In that event, the exemption would not comply with the chapeau. The Panel thus limited its findings qualitatively and quantitatively.

The Appellate Body started its analysis of the application of the chapeau to the measure at issue by reiterating its previous statements on the matter. Relying on its reports in US—Gasoline and US—Shrimp, the Appellate Body explained that a determination of arbitrary or unjustifiable discrimination ‘usually involves an analysis that relates primarily to the cause or the rationale of the discrimination’ and ‘should be made in the light of the objective of the measure’.Footnote ²⁸ A finding of arbitrary or unjustifiable discrimination would thus seem to depend on two separate factors and their mutual relationship: ‘a rational connection’ between the cause of the discrimination and the objective of the measure at issue. In this case, Brazil argued that the cause of the discrimination between its MERCOSUR trading partners and other non-MERCOSUR WTO Members was its obligation to comply with the decision of the MERCOSUR arbitral tribunal. The Appellate Body did not accept this argument. It did not pronounce itself on the merits of this cause of discrimination, but rejected the argument on the ground of a lack of rational connection between the cause of the discrimination resulting from the MERCOSUR exemption and the objective of the originally introduced import ban.Footnote ²⁹ Indeed, it went so far as to declare that the MERCOSUR exemption even ‘goes against this objective’.Footnote ³⁰ On the other hand, the Appellate Body did not exclude the possibility that the decision of another court or tribunal as such could be a cause of discrimination. It noted that the decision of a WTO Member to comply with legally binding decisions of other judicial or quasi-judicial bodies is rational, not ‘capricious’ or ‘random’.Footnote ³¹ This is hardly surprising as it is merely an application of the good faith principle of international law, whether it finds its source in WTO law or any other treaty context. Nevertheless, the rationality of the cause of discrimination is distinct from that of the relationship between the cause of the discrimination and the objective of the measure. As a result, the Appellate Body reversed the Panel's finding that the MERCOSUR exemption did not constitute an unjustifiable discrimination.Footnote ³²

It also responded to the qualitative and quantitative limits set by the Panel and found that these had no support in the text of the chapeau of Article XX GATT 1994. The test under the chapeau is one of the causes of the discrimination and not, or at least not exclusively, of the effects of the discrimination.Footnote ³³ Depending on the circumstances of each case, the effects of the discrimination ‘may be a relevant factor, among others, for determining whether the cause or rationale of the discrimination is acceptable or defensible and, ultimately, whether the discrimination is justifiable’.Footnote ³⁴ The Appellate Body criticized the Panel for exclusively assessing the measure at issue in respect of its effect and reversed the Panel on this matter. However, this criticism is not entirely valid, as the Panel's finding was based on the cause of the discrimination; it only examined the effects of the discrimination as a quantitative limit to its findings. The Appellate Body further responded to the qualitative limit set by the Panel in a footnote. It noted that the Panel's finding on the relationship between Articles XX and XXIV GATT 1994 is essentially one on the reconciliation of WTO Members' obligations in the WTO covered agreements and those embedded in other trade agreements and agreements establishing customs unions. Under Article XXIV:8(a) GATT 1994, a customs union must not eliminate all duties and other restrictive regulations of commerce with respect to substantially all the trade between the members of the customs union, provided such measures are necessary and can be justified on the basis of Articles XI, XII, XIII, XIV, XV and XX GATT 1994. The MERCOSUR exemption could be an example of such a measure, the Appellate Body observed, on the assumption that MERCOSUR complies with the requirements of Article XXIV and the import ban meets the requirements of Article XX.Footnote ³⁵ These were questions that the Appellate Body did not rule upon; it merely advanced the assumption. As a result, the report adds little to our understanding of Article XXIV GATT 1994, though there is a suggestion of how to reconcile the GATT 1994 with obligations under other trade agreements and the outcome of the decision meant that Brazil's measure was not sufficiently trade restrictive.

The second requirement is that the provisionally justified measure is ‘not applied in a manner which would constitute … a disguised restriction on international trade’. The EC had argued before the Panel that the MERCOSUR exemption was a disguised restriction on international trade because it benefits retreaders from Brazil and its MERCOSUR trading partners. The Panel rejected the EC's claim on the ground that the MERCOSUR exemption did not prevent MERCOSUR retreaders from importing casings from other non-MERCOSUR countries, retread them and then use the MERCOSUR exemption to export them to the Brazilian market.Footnote ³⁶ In other words, the MERCOSUR exemption did not entail a risk of trade diversion and did not undermine the effectiveness of the import ban. This may well be true, but it proves little with respect to whether the application of the import ban as a result of the exemption constitutes a ‘disguised restriction on international trade’. The Panel attached, again, a quantitative minimum limit to its interpretation of the meaning of a ‘disguised restriction’, finding that the measure at issue would only constitute such a disguised restriction if the result was that ‘imports from MERCOSUR countries were to occur in significant amounts’.Footnote ³⁷ This was not the case here because the actual volume of imported remoulded tyres under the MERCOSUR exemption had not been significant.Footnote ³⁸ The EC appealed this finding on the ground that the Panel had conflated both requirements of the chapeau by conditioning its finding with respect to the second requirement on its reasoning in applying the first requirement to the measure at issue. The Appellate Body dealt briefly with this point. Since it reversed the Panel's findings on the first requirement, consequently, the Panel's conclusion on the second requirement also needed to be reversed.Footnote ³⁹ Again, the Panel's interpretation of the chapeau of Article XX to include a quantitative minimum limit was found to have no textual basis. The Appellate Body did not go so far as to find that the limit also has no basis in sound economics, but such criticism appears to be implied.

4. The Court Injunction Exemption: Article XX GATT 1994—The Chapeau

As part of its comprehensive strategy, Brazil had also adopted a measure prohibiting imports of used tyres. As a result of court injunctions in specific cases, some imports of used tyres had been allowed in recent years. Although the Panel found that these imports favoured Brazilian retreaders, the resulting discrimination was not ‘capricious’ or ‘random’ and therefore not ‘arbitrary’.Footnote ⁴⁰ The Panel was consistent in its interpretation of the chapeau and examined again whether the court injunctions, nevertheless, resulted in a ‘significant’ amount of used tyres being imported to the extent of undermining the objective of the measure at issue. This was indeed the case and consequently it found that the import ban was applied ‘in a manner that constitutes a means of unjustifiable discrimination’.Footnote ⁴¹ In response to the EC's appeal of this finding, the Appellate Body was equally consistent in reversing the Panel's interpretation of the chapeau. The cause of the discrimination was compliance with court injunctions and this cause did not bear a rational relationship to the objective of the measure at issue, it even went against it.Footnote ⁴² The Appellate Body identified this objective as ‘reducing exposure to risks arising from the accumulation of waste tyres to the maximum extent possible’.Footnote ⁴³ It reversed the Panel's findings, including its quantitative approach, and found that the imports of used tyres as a result of the court injunctions did constitute an arbitrary and unjustifiable discrimination in the application of the import ban.Footnote ⁴⁴

With respect to the second requirement of the chapeau, the Panel had relied again on the same quantitative approach to find that the import ban was applied in a manner constituting a disguised restriction on international trade. While the EC agreed with the finding, it appealed the reasoning underlying the Panel's conclusion. It reiterated that there was no textual basis for conditioning a finding of a disguised restriction on international trade on whether the volume of imported used tyres was of an amount to significantly undermine the objective of the import ban. The Appellate Body relied on its reasoning with respect to the first requirement to reverse also the Panel's reasoning on the second requirement.Footnote ⁴⁵

5. The MERCOSUR Exemption: Articles I:1 and XIII:1 GATT 1994

Finally, the Appellate Body was asked to decide whether the Panel had appropriately exercised judicial economy with respect to the EC's separate claim that the MERCOSUR exemption was inconsistent with Articles I:1 and XIII:1 GATT 1994. The EC's appeal on this point was conditional upon the Appellate Body agreeing with the Panel that the MERCOSUR exemption was consistent with the chapeau of Article XX. However, the Appellate Body did not uphold that finding and consequently there was no need to rule on this matter because the condition was not fulfilled.Footnote ⁴⁶ The EC's separate claim related specifically to the MERCOSUR exemption, not the import ban as such. As discussed earlier, the Panel concluded that the import ban, which was inconsistent with Article XI:1, could not be justified under Article XX(b). The Appellate Body found that the Panel had exercised judicial economy on the ground that ‘the MERCOSUR exemption derives from and exists only in relation to the Import ban’.Footnote ⁴⁷ Even if the Appellate Body did not rule on this aspect of the EC's appeal, it did observe that the Panel might have inappropriately exercised judicial economy. Panels and the Appellate Body need to secure a positive solution to the dispute. The Panel's finding that the MERCOSUR exemption was consistent with the chapeau of Article XX GATT 1994 left the dispute unresolved with respect to the EC's claim that the measure might, nevertheless, be inconsistent with other provisions of the GATT 1994.Footnote ⁴⁸ Part of the dispute thus remained unresolved but the Appellate Body was not in a position to respond.