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Last week President Obama announced that the United States will suspend Argentina’s eligibility under the Generalized System of Preferences, for the country’s failure to pay two arbitral awards to US companies. This is the first time that the US invokes section 502(b)(2)(E) of the 1974 Trade Act, which states that GSP beneficiary status may be withdrawn if: Such country fails to act in good faith in recognizing as binding or in enforcing arbitral awards in favor of United States citizens or a corporation, partnership, or association which is 50 percent or more beneficially owned by United States citizens, which have been made by arbitrators appointed for each case or by permanent arbitral bodies to which the parties involved have submitted their dispute.”

The total sum of the two awards exceeds $300 million. The relatively small size of GSP benefits casts doubt on the effectiveness of Argentina’s suspension. In addition, withdrawal of GSP benefits will primarily hurt the private sector in Argentina while the arbitral awards would have been paid by the State. Importantly however, the legality of the US measure may also be contested. In 2004, the Appellate Body  (AB) of the World Trade Organization ruled in the EC-Tariff Preferences case that differentiation between GSP beneficiaries may be allowed, but only when the differentiation criteria respond positively to a development, trade or financial need in the developing country, which must be objectively identified by the GSP grantor and effectively addressed by the tariff preferences.

The EC-Tariff Preferences case and the suspension of Argentina could be differentiated on the basis of the narrow decision in the former case. The AB held that: ” … in this Report, we do not rule on whether the Enabling Clause permits ab initio exclusions from GSP schemes of countries claiming developing country status, or the partial or total withdrawal of GSP benefits from certain developing countries under certain conditions.” Such a ruling was not necessary given the specific questions before the AB. However, the language of the Enabling Clause and the 1971 GATT Waiver, which jointly authorize the GSP, refer to non-discriminatory preferential tariff treatment for products originating in developing countries, instead of a non-discrimination requirement between GSP beneficiaries.

If Argentina would challenge the Obama’s decision before the WTO, and the AB would hold that the same criteria apply in determining (withdrawal of) GSP eligibility as such, the United States would have to show that compliance with international arbitral awards would correspond positively to a development need.

 I find it difficult to accept that payment of $300 million would correspond positively to a development need of Argentina. Alternatively it could be argued that developing countries’ participation in, and observance of, investment treaties is a development need. After all, the presumption upon which countries ratify Bilateral Investment Treaties is that it would attract investment and spur economic growth. To my knowledge there are no publications that comprehensively discuss the concept of development needs in WTO law. A forthcoming one (in the American University International Law Review) can be found here. Although I do not necessarily agree with the author that only needs of economic development should be considered, Paliwal gives an interesting account of the (potentially) allowable conditions for discrimination within the GSP system.

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