## Facts

- India challenged tariff preferences granted by the European Communities (EC) under its Generalized System of Preferences (GSP), focusing on special “Drug Arrangements.”
- The Drug Arrangements provided additional tariff preferences to a limited set of developing countries identified as “drug-affected,” while excluding other developing countries, including India, for like products.
- India alleged the selective preferences breached GATT 1994 Article I:1 (most-favoured-nation treatment) and were not authorized by the 1979 Enabling Clause.
- During the dispute, India withdrew challenges to other EC GSP incentives (labour and environment) and limited its complaint to the Drug Arrangements.
- The panel found the Drug Arrangements (not the entire GSP scheme) inconsistent with GATT Article I:1 and not justified under the Enabling Clause; the EC appealed.
- The Appellate Body report was adopted by the WTO Dispute Settlement Body on April 20, 2004.

## Issues

1. Whether the Enabling Clause functions as an exception to GATT 1994 Article I:1, and how that characterization affects the burden of proof.
2. Whether the Drug Arrangements were justified under the Enabling Clause, including the meaning of “non-discriminatory” in paragraph 2(a).
3. Whether a GSP donor may grant additional preferences only to a subset of developing countries, and if so, what criteria must govern access to such preferences.

## Decision

- The Appellate Body upheld that the Enabling Clause operates as an exception (a permitted deviation) from GATT 1994 Article I:1, conditional on compliance with the Clause’s requirements.
- The Appellate Body affirmed that, once a complaining member establishes a prima facie MFN inconsistency under Article I:1, the respondent invoking the Enabling Clause bears the burden to prove its measure satisfies the Clause’s conditions.
- The Appellate Body upheld the panel’s finding that the EC Drug Arrangements were inconsistent with Article I:1 and not justified under the Enabling Clause.
- The Appellate Body found the EC failed to show that the additional preferences were available to all similarly situated developing countries through objective, neutral, transparent, and non-arbitrary criteria.
- Because the beneficiaries were limited to a closed list without a clearly defined mechanism for other similarly situated countries to qualify, the Drug Arrangements were outside the Enabling Clause authorization.

## Legal Principles

- The Enabling Clause is an affirmative defense to an established GATT 1994 Article I:1 violation; the invoking member must demonstrate that the measure falls within, and complies with, the Clause.
- “Non-discriminatory” in Enabling Clause paragraph 2(a) does not require identical preferences for all developing countries; it permits differentiation that responds to development, financial, and trade needs.
- Differential preferences under a GSP scheme must be designed and applied so they do not discriminate among similarly situated developing-country beneficiaries.
- A donor may condition or differentiate preferences only using objective, neutral, transparent criteria that do not preclude any developing country with the relevant characteristics from qualifying.

## Conclusion

The Appellate Body confirmed that preferential tariff schemes for developing countries may depart from MFN only within the Enabling Clause’s limits, requiring needs-based differentiation grounded in objective and open criteria; the EC’s Drug Arrangements failed that test and therefore remained an unjustified MFN violation.


European Cmtys.—Conditions for the Granting of Tariff Preferences to Developing Countries, WTO Doc. WT/DS246/AB/R (Apr. 20, 2004)