## Facts

- Venezuela and Brazil challenged U.S. Environmental Protection Agency regulations under the Clean Air Act governing reformulated and conventional gasoline quality in the United States.
- The regulations required gasoline sold in certain polluted areas to meet stricter reformulated-gasoline standards and imposed baseline rules to measure compliance for both domestic and imported gasoline.
- Domestic refiners could generally use an “individual baseline” based on the refiner’s own 1990 gasoline characteristics.
- Foreign refiners generally had to use a “statutory baseline” based on average 1990 gasoline sold in the United States, limiting their ability to demonstrate compliance using their own 1990 production.
- The complainants alleged the baseline system disadvantaged imported gasoline in the U.S. market.
- A WTO panel found the baseline provisions inconsistent with GATT 1994 Article III and not justified under Article XX; the United States appealed legal conclusions and interpretations.
- The Appellate Body issued its report, and the Dispute Settlement Body adopted the Appellate Body and Panel reports on May 20, 1996.

## Issues

1. Whether the baseline system accorded imported gasoline “less favourable” treatment than like domestic gasoline under GATT 1994 Article III:4.
2. If Article III:4 was breached, whether the measure was justified under GATT 1994 Article XX(g) as relating to conservation of exhaustible natural resources and made effective with domestic restrictions.
3. Whether the measure, even if within Article XX(g), satisfied the Article XX chapeau by avoiding arbitrary or unjustifiable discrimination or a disguised restriction on international trade.
4. What interpretive approach governs WTO treaty interpretation in dispute settlement.

## Decision

- The Appellate Body upheld the finding that the U.S. baseline rules violated GATT Article III:4 by modifying competitive conditions to the detriment of imported gasoline.
- The Appellate Body modified the Panel’s Article XX analysis, concluding the measure fell within Article XX(g) because it related to conserving clean air and operated alongside restrictions affecting domestic gasoline.
- The Appellate Body nevertheless found the measure failed the Article XX chapeau because the differential baseline treatment constituted unjustifiable discrimination and functioned as a disguised restriction on trade.
- The ultimate result—U.S. nonconformity with GATT 1994 not excused by Article XX—was upheld.

## Legal Principles

- WTO covered agreements are interpreted using customary rules of public international law, reflected in Vienna Convention Articles 31 and 32, and dispute settlement must clarify provisions without adding to or diminishing rights and obligations.
- “Treatment no less favourable” in GATT Article III:4 turns on equality of competitive conditions; a formally neutral scheme can violate Article III:4 if it adversely affects competitive opportunities for imports.
- Under GATT Article XX(g), “exhaustible natural resources” can include clean air, and the phrase is not fixed in meaning; a measure qualifies if it bears a substantial relationship to conservation and is made effective together with domestic restrictions.
- Satisfaction of a specific Article XX subparagraph is insufficient if the measure’s design or application results in arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or operates as a disguised restriction on international trade.
- Administrative or enforcement concerns do not justify discrimination where a member chooses regulatory means that impose materially different compliance opportunities for foreign and domestic producers without adequate justification.

## Conclusion

The Appellate Body held that the United States’ gasoline baseline rules impermissibly disadvantaged imported gasoline under GATT Article III:4 and, although aimed at conserving clean air within Article XX(g), could not be defended because their asymmetric baseline methodology constituted unjustifiable discrimination and a disguised restriction on trade under the Article XX chapeau.


United States—Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R (WTO App. Body 1996)