First Aid for Free Trade?: Türkiye — Pharmaceutical Products (EU)
The final report of the panel in Turkey – Certain Measures concerning the Production, Importation and Marketing of Pharmaceutical Products was circulated to the parties on the 11th of November 2021. However, on 22nd March 2022, the parties notified the Dispute Settlement Board (hereinafter ‘DSB’) with respect to the Agreed Procedures for Arbitration under Article 25 of the Dispute Settlement Understanding (hereinafter, ‘DSU’). On July 25, 2022, the Arbitrator’s Award was issued in the dispute.
Question: What is the localization measure in question?
Answer: Türkiye’s Universal Health Insurance Scheme allows for the reimbursement of the purchase of certain pharmaceutical products. Reimbursable pharmaceutical products are notified as ‘active’ under Annex 4/A to the Health Implementation Communiqué. In order for a pharmaceutical product to be reimbursable, foreign manufacturing companies commit to produce such pharmaceutical products in Türkiye (a.k.a., localization).
Question: What is Article 25 of the DSU?
Answer: Article 25 of the DSU provides an alternative method for the resolution of disputes between the contracting parties, via arbitration. Clause 2 thereunder stipulates that the parties may resort to arbitration only upon mutual agreement to resolve the dispute via arbitration on agreed upon procedural terms. Additionally, in US – Section 110(5) Copyright Act (Article 25) the panel has ruled that the award made thereunder would be binding upon the parties only where the parties have mutually agreed upon such terms. Thus, the arbitration would take place in consonance with the mandate that is provided to the arbitrators.
Question: What was the mandate of arbitration in the present instance?
Answer: The European Union and Türkiye mutually agreed to enter into arbitration under article 25 of the DSU with the mandate to decide any appeal from the final panel report as issued to the parties in the dispute DS583. Additionally, the findings of the panel which were not appealed would form an integral part of the arbitral award itself.
The issues in appeal were as follows:
Panel’s interpretation of Article III:8, GATT
Panel’s interpretation of Article XX(b), GATT
Panel’s interpretation of Article XX(d), GATT
Panel’s ‘objective assessment’ under Article 11, DSU
Localization requirement vis-à-vis Article III:8 of the GATT
Question: What does Article III:8 of the GATT state?
Answer: Article III:8 of the GATT provides an exception to the national treatment obligation under Article III – which requires the contracting parties to provide similar treatment to both domestic as well as imported goods. For a measure to fall within the scope of this provision, the product in question must – i) be procured by a government agency and ii) for a governmental purpose. Where the two conditions are met, the measure falls within the scope of Article III:8 of the GATT.
Question: What did the Panel find with regard to Article III:8 of the GATT?
Answer: The final report of the panel found that the ‘localization requirement’ did not qualify for the protection under Article III:8 of the GATT on the basis that the measure does not fulfill the ‘products purchased’ requirement thereunder. This finding was appealed before the arbitrators.
Question: Why did Türkiye believe that the localization measure would qualify under the exemption provided by Article III:8 of the GATT?
Answer: The purchase of pharmaceutical products by outpatients was being reimbursed by the government. Therefore, the transactions implied that the government purchased the pharmaceutical product and then transferred the same to the outpatients. This fulfilled the requirement of the ‘government procurement’ under Article III:8 of the GATT.
Question: What did the arbitrators find with regard to the term ‘government procurement’ within the meaning of Article III:8 of the GATT?
Answer: It was found that the outpatients purchased the pharmaceutical products independent of government involvement. Even though the purchase was reimbursed, the government did not possess ownership over the product at any given moment since it was simply a transaction between the pharmacy and the outpatient. Additionally, it was also observed that the product was not procured for any governmental purpose. On these grounds, it was found that the measure would not qualify under Article III:8 of the GATT.
Localization requirement and Article XX(b) and (d) of the GATT
Question: What does Article XX of the GATT state?
Article XX of the GATT consists of certain general exceptions. Any measure which is found to be inconsistent with the provisions of the GATT can seek an exception where it qualifies for the protection offered under Article XX. For any measure to qualify for protection under one of the general exemptions listed under Article XX, it must be examined:
a) whether the measure is applied in a manner which does not constitute arbitrary or unjustifiable discrimination between countries where same conditions prevail; and
b) whether the measure is a disguised trade restriction.
Question: When can a measure be protected for being necessary for the protection of human life?
Clause (b) of Article XX of the GATT allows the contracting parties to adopt measures which are necessary for the protection of human, animal or plant life, regardless of whether the measure stands inconsistent with the other provisions of the GATT. Whilst determining whether a measure qualifies under Article XX(b) of the GATT the panel examines the following:
i) whether the objective of the measure pertains to the protection of human life or health;
ii) whether the measure is designed to protect human, animal or plant life, i.e., whether the structure of the measure suffices to meet the objective
iii) whether the measure is necessary to protect human, animal or plant life.
Question: What did the Panel find with regard to Article XX(b) of the GATT?
Answer: The final report circulated by the panel found that the Localization requirement did not qualify for protection under Article XX(b) of the GATT since it did not intend to protect human, animal or plant life.
Question: Why did the localization measure not qualify for protection under Article XX(b) of the GATT?
Answer: The arbitrators held that while the measure may have qualified the first requirement under article XX(b), there is no evidence to show that the measure was designed to protect human life. In particular, there was no evidence to supplement the argument that there was a health risk that the measure attempted to resolve.
Question: Can a Member adopt a measure (which may be inconsistent with the GATT) to comply with another measure which is consistent with the GATT?
Answer: Article XX(d) of the GATT provides an exception whereby the members may adopt certain measures which may otherwise be inconsistent with the provisions of the GATT, to the extent that such measures are necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of the GATT, subject to its application in compliance with the chapeau of Article XX. Whilst determining whether a measure would fall within the scope of Article XX(d), the panel examines the following:
i) the relationship between the said measure and the objective that it seeks to attain; where there exists a nexus between the measure and the objective, the panel examines
ii) whether the measure is ‘necessary’ to attain this objective.
Question: Could Türkiye’s localization measure qualify for protection under Article XX(d)?
Answer: The arbitrators upheld the panel’s finding on the basis that the measure did not bear any nexus with the objective of complying with the laws that seek to secure accessible, effective and financially sustainable healthcare for its population; rather the measure purses an industrial policy of reducing the quantity of pharmaceutical products that are imported into the country. Since the test under Article XX(d) are cumulative in nature, the measure does not qualify for the protection offered thereunder.
Article III:8(a) of the GATT
The ‘localization requirement’ measure does not qualify under Article III:8(a) since the products were not procured by a government agency as required thereunder. Further that the measure is inconsistent with Article III:4 as found by the panel.
Article XX(b) of the GATT
The ‘localization measure’ does not satisfy the ‘design’ requirement under Article XX(b) and therefore fails to attract the protection offered thereunder.
Further that the panel did not exceed its authority under article 11 of the DSU for it has made an ‘objective assessment’ of the facts placed before it.
Article XX(d) of the GATT
The measure was not implemented to comply with the relevant laws or regulations as described by Türkiye and therefore fails to attract protection under Article XX(d) of the GATT.