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National Treatment principle - Analysis of GATT Article III

By Lakshmi Neelakantan        

Among the pillars of the modern trading system that developed due to the genesis of GATT/WTO, principle of National Treatment is arguably one of the most significant. It is often regarded as a cornerstone of the GATT/WTO regime and is present in many of the agreements under the WTO, including the General Agreement on Trade in Services (GATS), the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPs) and the Agreement on Trade-related Investment Measures (TRIMs).  National treatment is one of the components of the principle of non-discrimination in the multilateral trading regime; the other is the Most Favoured Nation Treatment (MFN). Importance of principle of national treatment under not just the WTO but also under a number of other international treaty regimes is reflected in its presence in most Bilateral Investment Treaties (BITs) in existence today, thus effectively transforming the way in which nations trade with one another [see end note 1].                 

This article seeks to outline the scope of the provisions of Article III of GATT 1994, and highlight noteworthy points of interpretation under  Articles III:1 and III:2  in order to acquire a fundamental understanding of the concept of national treatment under the above provisions and its interpretation by various WTO panels and the Appellate Body.          

The principle of national treatment, in simple terms, prohibits discrimination between imported goods and domestically produced goods with regard to internal taxation or regulation. The history of Article III can be traced to Article 18 of the failed Havana Charter [see end note 2] which sought to create the International Trade Organisation (ITO), and provisions of which were reworked into GATT 1947. Article III, in its present form, has been incorporated into GATT 1994 by way of reference.
               
In the seminal dispute of Japan –  Taxes on Alcoholic Beverages, the Appellate Body stated that the purpose of Article III was to avoid protectionism in the application of internal tax and regulatory measures and further extended this postulation to mean that members were obligated to provide equal competitive conditions for imported products in relation to domestic products [see end note 3]. Thus, the focus of Article III is that laws and regulations are not enacted in favour of domestic goods so that imported goods are left with a lesser competitive advantage in the marketplace.          

For a more detailed understanding, the relevant extracts of Article III are provided below:            

 "Article III - National Treatment on Internal Taxation and Regulation          

1.       The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.        

 2.       The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1."        

Analysis of Article III:1          

Article III:1 emphasizes that internal taxes and other charges, in addition to other laws, regulations or requirements which may affect the internal sale, offering for sale, purchase, transportation, distribution or use of products should not be applied so as to afford protection to domestic production. Article III:1 contains general principles, as opposed to specific obligations contained in other provisions of Article III. However, the general principles enshrined in Article III:1 act as a guiding principle for, and inform the interpretation of the other obligations contained in Article III, apart from the text of the provisions themselves [see end note 4].               

Article III:1 often influences the manner in which other provisions such as Articles III:2 and III:4 are interpreted. For instance, the question of which kind of charges fall within the scope of Article III is determined by the usage of the words "internal" and "imported", which suggests that Article III covers charges that are imposed on goods that have already been imported" and the obligation to pay such charges is triggered by an internal factor which takes place inside the relevant customs territory [see end note 5].

Furthermore, the phrase "so as to afford protection to domestic production" is also interpreted to mean that intent is not the key factor for a finding of violation or non-violation, thereby rejecting the so-called "aim-and-effect" test. Indeed, it is immaterial if protection to the domestic industry was not the intended objective of the measure because the relevant consideration is the application of the measure [see end note 6] Therefore, the test of a measure's consistency with Article III will necessarily entail a comprehensive analysis and scrutiny of the design, architecture and entire structure and application of the measure in question [see end note 7].

Analysis of Article III:2, first sentence    
       

With regard to the application of Article III:2, jurisprudence shows that the scope of the first and the second sentence of Article III:2 differ substantially from one another. A combined reading of the text as well as relevant interpretations reveal that a two-tiered test exists in order to ascertain whether a measure is in violation of Article III:2, first sentence [see end note 8]: 
            
  • Whether the imported products of one contracting party and the domestic products of another are "like products"; 
  • Whether the imported products are taxed "in excess" of the like domestic product.           
The criteria relating to "likeness" will involve a case-by-case determination of the product's properties, nature and quality; the product's end-uses in a given market; consumers' tastes and habits and a uniform tariff classification [see end note 9]. In addition, the test with regard to the phrase "in excess of" is applied strictly to the tax or charge faced by the imported products and the domestic products, and the tax/charge in question is not required to be scrutinized under a "trade effects" test or a de minimis standard. Even a small amount of tax on imported products which is "in excess" of the tax on the like domestic product will attract a violation of the first sentence of Article III:2 [see end note 10].             

 Analysis of Article III:2, second sentence        

However, the scope of the second sentence of Article III:2 is significantly altered by Ad Article III:2 which is extracted as follows:

"Paragraph 2      
A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed."      

The following points of interpretation thus arise from Article III:2, second sentence.  First, the phrase "in a manner contrary to the principles set forth in paragraph 1" indicates that it specifically  invokes the application of Article III:1, as opposed to the implicit invocation of Article III:1 in the first sentence of Article III:2.      

Furthermore, for a measure to be in violation of the second sentence of Article III:2, the following elements must be fulfilled [see end note 11]:             
  • The imported products and the domestic products are "directly competitive or substitutable products" which are in competition with each other;       
  • The directly competitive or substitutable imported and domestic products are "not similarly taxed";        
  • The dissimilar taxation of the directly competitive or substitutable imported domestic products is "applied...so as to afford protection to domestic production", a criterion which is present in Article III:1.          
As can be inferred from the above requirements, the category of goods that can be evaluated under the second sentence of Article III:2 is broadened to "directly competitive or substitutable products"  from "like products" in the first sentence of Article III:2.        

Conclusion        

The analysis in the foregoing paragraphs reveal that Article III:2 is structured such that if the imported and domestic products are not "like", then no violation of the first sentence of Article III:2 is triggered. However, in light of the second sentence of Article III:2, the products in question may not be "like" products, but may still fall within the scope of "directly competitive or substitutable goods" as per Ad Article III:2 [see end note 12]. Thus, Article(s) III:1 and III:2 necessitate a multi-layered examination of a measure which may involve varied questions of fact and law. In conclusion, the principle of national treatment under Article(s) III:1 and III:2 will be interpreted according to the facts and circumstances of each case and the panel/Appellate Body is expected to apply the relevant principles on a case-by-case basis.      

[ The author is an Associate, International Trade Practice, Lakshmikumaran & Sridharan, New Delhi ]      

End Notes:
  1. National Treatment, UNCTAD Series on issues in International Investment Agreements, UNCTAD/ITE/IIT/11 (Vol. IV) (United Nations, 1999). 
  2. Havana Charter for an International Trade Organization, Final Act and Related Documents, United Nations Conference on Trade and Employment, United Nations Document E/Conf. 2/78 (Nov. 21, 1947- Mar. 24, 1948). 
  3. Appellate Body Report, Japan - Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, page 16 (1 November 1996) ["Japan - Alcoholic Beverages"]. 
  4. Id, page(s) 17-18. 
  5. Appellate Body Report, China - Measures Affecting Imports of Automobile Parts, WT/DS339/AB/R, WT/DS340/AB/R / WT/DS342/AB/R, para 161 (12 January 2009). 
  6. Japan - Alcoholic Beverages, supra note 3, page(s) 27-28. 
  7. Id, page 29. 
  8. Id, page(s) 18-19; Appellate Body Report,Canada - Certain Measures Concerning Periodicals, WT/DS31/AB/R, page(s) 22-23 ["Canada - Periodicals"].
  9. Report of the Working Party on Border Tax Adjustments, BISD 18S/97, para. 18 in Japan - Alcoholic Beverages,supra note 3, page 20 &Canada- Periodicals,supra note 8, page(s) 20-21.
  10. Japan- Alcoholic Beverages, supra note 3, page 23. 
  11. Japan- Alcoholic Beverages, supra note 3, page 24.
  12. Japan- AlcoholicBeverages, supra note 3, page 25.
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