Brazil – Measures Affecting Imports of Retreaded Tyres: A Balancing Act

This paper provides a legal-economic analysis of the Appellate Body decision in Brazil–Retreaded Tyres. We develop a simple economic model that we use to analyze the market structure and environmental externalities that were most relevant to this case. We start by analyzing Brazil's policies in a model in which tyre retreading generates a positive production externality through the delay it provides society before a used tyre becomes a waste product with the potential to harm society through its adverse impact on human health and the environment. We examine the different welfare implications of (i) a production subsidy for retreading of once-used Brazilian tyres, (ii) a tariff on imports of retreaded tyres, and (iii) a ban on imports of retreaded tyres. While a production subsidy is the first-best instrument to address this type of externality, there are reasons to believe that it might be infeasible. The welfare implications of the other measures depend importantly on the magnitude of the positive production externality. From the lens provided by this economic analysis, we draw three primary insights. First, we identify the critical piece of empirical information that the Panel and Appellate Body require to make a rational judgment of the utility of the Brazilian policies contested in the dispute – i.e., the size of the underlying externality associated with retreading. Second, if the justification for the original import ban on retreaded tyres was based on the argument that it was a second-best Brazilian policy designed to combat a large externality, then Brazil's failure to enforce a ban on used-tyre imports has the troubling result of eroding those potential welfare gains through a reduction in equilibrium production (and consumption) of Brazilian retreaded tyres. Third, the Brazilian policy that exempted from the ban retreaded imports from MERCOSUR partners also has the same troubling feature. The second and third points are congruent with the reasons for the Appellate Body's determination that the Brazilian policy did not qualify under the chapeau of Article XX. We examine the WTO jurisprudence of Article XX(b), in order to compare the methodology developed under this jurisprudence to the type of examination of changes to total welfare from implementing one policy relative to a postulated alternative policy that most economists would follow. We find that the WTO jurisprudence in this area is internally incoherent, and also fails to evaluate the types of concerns that an economic-welfare analysis would evaluate.