Carpetland and Rugland are neighbouring countries and founding Members of the

WTO. Both countries are known worldwide for the production of fine handmade (hand-
knotted) silk carpets (also known as rugs and both terms are used interchangeably in this
problem). Carpetland is a developed country with very high labour standards – it takes ILO
core labour standards seriously, including standards on child labour. Carpetland prohibits
child labour and in particular prohibits children from working in its rug industry.
Furthermore, Carpetland requires manufacturers to install state-of-the art ventilation
equipment that minimizes the risk to workers from breathing silk fibres. Because of these
measures, the cost of production for rugs from Carpetland is generally 35% higher as
compared with rugs from Rugland.
Rugland is a developing country. The quality of its handmade silk rugs is prized
internationally because it produces carpets in the traditional way. One of the reasons that
Rugland’s carpets are so prized is because of the small knots in its most expensive silk
carpets. Children are used to produce the most expensive silk carpets, because children have
small hands and are able to tie smaller knots than adults. Silk carpets with smaller knots (high
number of knots per square inch) command a higher price on the international market than
those with a lower number of knots per square inch. Therefore, Rugland enjoys a comparative
advantage due to its lax laws on child labour, enabling manufacturers to employ children to
tie the smaller knots resulting in a higher number of knots per square inch. Rugland enjoys a
year-round temperate climate and children working in Rugland’s carpet industry work
outside, sheltered from the sun. Working outside minimizes the risk of inhaling silk fibres.
Due to their high quality, traditional design and lower prices, Rugland’s carpets are
popular in Carpetland and many other countries. As Rugland develops, its carpet industry is
becoming even more competitive. Carpetland’s rug manufacturers believe that they are not
competing on a level playing field in large part due to Rugland’s lax laws on child labour and
worker safety.
Carpetland is very committed to stamping out child labour and to assuring that carpet
workers around the world work under safe conditions. Carpetland’s parliament is considering
two measures:
(i) raising its import tariff on carpets (up to its maximum bound rate of 40%), with a complete
exemption/waiver from this tariff (i.e. 0%) for carpets produced in countries that have laws
prohibiting child labour in the carpet industry; and
(ii) prohibiting the sale of carpets (whether domestic or foreign) produced in facilities without
state-of-the-art ventilation equipment in the same stores as carpets produced with state-of-
the-art ventilation facilities.
You are asked whether the law, if and when enacted, could be challenged under the
GATT 1994 and what the chances of success of such a challenge would be. In other words,
whether the law, if and when enacted, is consistent with the GATT 1994. If it is not, whether
it can be justified under exceptions of the GATT.
Notes: Complainant – Rugland
Respondent – Carpetland