WTO Disciplines on the Transit of Goods Case Study – Differential Lithuanian Rail Charges

1. WTO Disciplines on the Transit of GoodsCase Study – Differential Lithuanian Rail Charges Scott Anderson Kaliningrad, 26 March 2015

2. Outline of presentation • Relevant facts relating to case study of WTO Transit Rules – • Higher rail rates applied by and in Lithuania to goods destined for Kaliningrad Oblast compared to identical goods destined for Lithuanian ports or Lithuania • Relevant provisions of the WTO covered agreements • Strategic Considerations to resolve problem

3. Relevant Facts • In January 2015, Lithuania’s state-owned Rail Directorate applied new annual rail charges for goods transported by rail within Lithuania • The new tariff “guidelines” in 2015 continue a measure – in place since 2004 – in which Lithuania imposes differential rail rates for identical products travelling over Lithuanianrail lines depending on the destination of the goods. • Higher rail rates for products from any origin with a destination in Kaliningrad than identical products with a destination in Lithuania port of Klaipeda

4. Relevant Facts – Differential Rail Tariffs • Cast iron: 0.85 rate coefficient destination Kaliningrad • 0.26 rate coefficient destination Klaipeda • Ferrous M 0.75 rate coefficient destination Kaliningrad • 0.31 rate coefficient destination Klaipeda • Salt 0.66 rate coefficient destination Kaliningrad • 0.30 rate coefficient destination Klaipeda • Other Goods 1.00 rate coefficient destination Kaliningrad • 0.52 rate coefficient destination Klaipeda

5. Relevant Facts – Lower Rates for Rail Traffic from Ukraine & Belarus • 2015 Lithuanian rates for Ukraine & Belarus: • Belarus – Salt from Belarus to Klaipeda Port has coefficient of 0.30 percent • Ukraine – Ferrous metals from Ukraine to Klaipeda Port has coefficient of 0.28 • By Contrast – Salt & Ferrous metals from any source to Kaliningrad region is 0.66 and 0.75 respectively

6. Lithuania Rail Network Radviliskis – Klaipeda route From Belarus and Russia Through Navapolatsk Kaliningrad Port To Kaliningrad Oblast From Ukraine

7. Lithuania Rail Network:all routes same gauge size and capacity

8. Relevant Facts – Accession Commitments • 2004 Accession of Lithuania Commitments • Para 22 of Working Party report • Apply the minimum prices and price controls for, inter alia, “Tariffs for carriage of goods by railway transport” • All tariffs must be minimum prices – not certain tariffs at minimum prices and other tariffs at greater prices • Para 143: Lithuania would conform to WTO Provisions, including Article V of GATT 1994

9. Relevant Facts – Effects of measures Kaliningrad is a free port with zero import tariffs Capability of producing/shipping goods to EU/RF Kaliningrad goods become more relatively more costly because of high transport costs to non-EU markets Higher rates act as limit on development & investment Kaliningrad also major & natural port for RF, Belarus, & Ukraine goods Higher rail rates through Lithuania deter traffic Lower revenue & income for Kaliningrad

10. Relevant Provisions of WTO Agreements • Article V of the GATT 1994 • freedom of transit • Article I of the GATT 1994 • Most Favoured Nation (MFN) • Article III of the GATT 1994 • non-discrimination/national treatment • Lithuania Accession Agreement

11. Article V protects free transit of goods • Transit, n. - “The action or fact of passing across or through; passage or journey from one place or point to another” (OED Online). • Free transit = without impediment or restriction • Fundamental principle of WTO Law: vital for free trade of goods between Members

12. GATT Article V: Obligations • Article V:2: • freedom of transit must be provided via most convenient route • no distinction allowed based on: flag State; place of entry; place of origin; destination • Article V:3: • transit must not be subject to unnecessary delays or restrictions” • transit must be exempt from customs duties or other charges except charges commensurate with administrative expenses/costs

13. GATT Article V: Obligations • Article V:4: • Charges imposed on transit “shall be reasonable” • Article V:5: • Charges in connection with transit must be applied on MFN basis • Article V:6: • Treatment “no less favourable” than if goods had not passed through territory of member (i.e. direct to final destination instead).

14. Goods in Transit - Cross-Border Rail Freight

15. Interpretation of GATT Article V • Colombia – Ports of Entry (Panel) (only dispute to interpret GATT Article V) • Facts: • Goods from Panama were obliged to be shipped through two specific ports before they could transit through Colombia. • But there were 10 other Ports including ones that were closer and cheaper for Panama to use to ship through Colombia to other parts of Latin America • Claims: • Article V:2 (freedom of transit)

16. Colombia – Ports of Entry Main Panel Findings: • Article V:2 • Colombia required to “extend... unrestricted access via the most convenient routes for the passage of goods in international transit ...” • “goods in international transit from any Member must be allowed entry whenever destined for the territory of a third country” • “no distinction in the treatment of goods based on origin or trajectory prior to arrival or based on transport or vessel of the goods” • “goods from all Members must be ensured an identical level of access and equal conditions when proceeding in international transit”

17. Most Favoured Nation - GATT Article I • Requires that any “advantage, favour, privilege or immunity” afforded to one Member be “immediately and unconditionally” applied to other Members • Cheaper rail tariffs are an “advantage” • Belarus & Ukraine goods advantaged & treated more favourably by receiving cheaper rail rates than identical RF goods shipped from RF through Lithuania to RF in Kaliningrad • Claim likely successful if: Higher tariffs imposed on Russian goods transiting through Lithuania compared to like goods of other WTO members enjoying lower rates in their transit through Lithuania

18. GATT Article III • Article III:2: • requires that charges on imported products must not be applied in “excess” of those applied to domestic products • RF exports to Lithuania from Kaliningrad have rail charges imposed which are higher than charges imposed on shipments of like Lithuanian goods • Article III:4: • requires that measures affecting internal sale accord “treatment no less favourable” to imported products as compared to domestic products • Higher rail tariffs for Kaliningrad origin products provide competitive advantage to Lithuanian producers of like products

19. Lithuania Accession Obligations • Para 22 of Working Party report • Accession Commitment to apply the minimum prices and price controls for, inter alia, “Tariffs for carriage of goods by railway transport” • This means that all tariffs applied must reflect minimum prices – prices for rail traffic throughout Lithuania • Claim Likely Successful if: Failure of Lithuania to apply the “minimum” tariff to rail shipments to goods destined for Kaliningrad. Any differentials in tariffs not connected to actual operating cost differentials would run afoul of this commitment.

20. Trade Facilitation Agreement • Possible future basis for challenge -- awaiting full ratification – requires 2/3 of members • Purpose: expedite the movement, release and clearance of goods, including goods in transit. • Article 11(4) – Express MFN treatment to goods in transit • Article 11(6) – All documentary requirements at border points must not be more burdensome than necessary to: • Identify goods • Ensure fulfilment of transit requirements

21. Viable claims – Article V of GATT 1994 • GATT Article V: • Article V:2 Lithuania has imposed specific measures which affect transit by the most convenient route between Russia/Belarus/Ukraine and Kaliningrad Oblast, and illegally distinguishes these goods based on their origin or destination. • Art. V:3: Lithuania imposes charges in excess of costs • Art. V:4: Lithuania imposes “unreasonable” charges • Art. V:5: Lithuania imposes charges that are not consistent with the most favoured nation principle • Art. V:6: Lithuania fails to provide same tariff rate advantages to RF goods in transit to Kaliningrad that it does for goods whose final destination is Lithuania

22. Other Viable Claims GATT Article I: Goods in transit to Kaliningrad are treated less favourably by Lithuania in comparison with goods in transit to other members. GATT Article III: Lithuanian goods are NOT affected by the same, or similar, rail freight rates as those destined for Kaliningrad. Lithuanian WTO Accession Commitments to impose only minimum prices for all rail transport

23. Strategic considerations for Russia • Is this a problem worth challenging? • Lithuanian tariff differentials imposed for many years • Problem not going away • Even if WTO challenge takes 2-3 years, it will deal with the long-term problem • Will implementation be possible if a win? • Lithuania will have to equalize tariffs as RF had to in its own Accession Protocol obligations • Is there a major economic impact? • Limits services income from handling greater amounts of transit traffic at Kaliningrad port • Limits advantages of free trade zone by imposing higher costs of exporting

24. Strategic Considerations for RF • Key Factual Proof: • Are the rail tariffs set out by Lithuania reflecting “normal costs” for transit through Lithuania? • Are differential rates justified by longer distances or more costly sections of Lithuanian rail system? • What are the RF “like” products being negatively impacted • What is total economic cost of higher tariffs on Kaliningrad

25. RF Vulnerabilites – Tit-for-Tat Is RF vulnerable to EU counter-challenge • Does Kaliningrad impose measures on intra-EU trade transiting through Kaliningrad that might raise transit-related claims? • Does Kaliningrad impose restrictive import measures – either de jure or de facto to impede the free import or movement of EU goods into Kaliningrad or the RF? • Has the RF fully implemented its Accession Commitments to end Russia’s Differentiated Railway Tariff Program (set to end by 1 July 2013? • RF officials in Ministry of Economic Development will be concerned about these issues – in addition to demanding a full detailing of claims and likely defenses.

26. Strategic considerations for Russia • Explore all possibilities for Settlement? • Negotiations to resolve all rail & transit related disputes between Kaliningrad & Lithuania? • Establishment of bilateral working group to resolve disputes as they arise? • Advantages are lower costs and faster • Disadvantages are non-binding nature and difficulty of enforcing