Frontier Trade: Advantages accorded by a Member to adjacent countries in order to facilitate frontier traffic are permitted (Article XXIV.3 of GATT 1994).
Government Procurement: The MFN obligation of Article I does not apply to the import of products for immediate or ultimate consumption in government use and not otherwise for resale or use in the production of goods for sale. There is a special plurilateral agreement governing such purchases.
General Exceptions: Article XX of GATT1994 allows Members to restrict imports or export from/to specific sources. Such measures can be taken for some specified purposes, for example, for the protection of public morals, protection of human, animal or plant life or health, etc.
Security Exception: Restrictions on imports and exports from/to specific countries can be imposed for security reasons in accordance with Article XXI of GATT1994.
The basic objective of the MFN treatment principle is to strengthen the multilateral process in international trade policy. When two countries exchanging tariff concessions between themselves extend these new tariff levels to all Members, the principle that gets emphasized is that all Members have an expectation of sharing the benefits of the system. In the same way, when a Member gets into some difficulty, for example, because of a balance-of-payments problem or increased imports, all Members get prepared to share the burden of reduced export opportunities into the territory of that Member.
The multilateral process is further eroded by the formation of large regional trading blocs. If the world is divided into a few very large trading blocs, the relevance of the multilateral system will be very much reduced. Another risk to the multilateral process comes from unilateral action or the threat of such action from economically strong Members of the system. It reduces the confidence of the weaker Members in the efficacy and effectiveness of the system.
National Treatment.
National treatment is also an important basic principle in the WTO agreements. MFN essentially means non-discrimination as among Members, while NT means non-discrimination as between domestic products or services and imported products or services. Basically, the principle of NT prescribes the obligation that an imported product, after entering the country of import, should be treated as a national product. The national treatment principle condemns discrimination between foreign and national goods or services and service suppliers or between foreign and national holders of intellectual property rights. Imported goods, once duties have been paid, must be given the same treatment as like domestic products in relation to any charges, taxes, or administrative or other regulations. With regard to the protection of intellectual property rights, and subject to exceptions in existing international conventions, Members of WTO are committed to grant to nationals or other Members treatment no less favorable than that accorded to their own nationals. GATS, however, due to the special nature of trade in services, deals with national treatment under its Part III, Specific Commitments, where national treatment becomes a negotiated concession and may be subject to conditions or qualifications that Members have inscribed in their schedules on specific commitments in trade in services.
The main objective of this principle is to ensure that the effects of tariff concessions are not frustrated by providing indirect protection to domestic products. These disciplines aim at establishing competitive conditions for imported products in relation to domestic products and at providing equal opportunities to imported products and domestic products in the domestic market.
Basic Discipline of NT.
Imported products must not be subject to internal taxes or other internal charges in excess of those applied to like domestic products. For example, an exercise tax which is applicable to a domestic product cannot be applied to an imported product at a rate higher than that applicable to the domestic product. Similarly, an imported product cannot be subject to a charge which, for example, is in the nature of a contribution to a fund meant for facilitating imports, if such a charge is not levied on the like domestic product.
Imported products must not be accorded treatment less favorable than that accorded to like domestic products with respect to laws, regulations and requirements affecting their sale, purchase, transportation, distribution or use. For example, it is not permissible to lay down a condition that an imported product must be stored in particular types of warehouses or must be transported by particular types of vehicles, when no such conditions apply to a like domestic product.
A Member cannot have any quantitative regulation requiring compulsory utilization of a product from a domestic source in preference to using a like imported product. For example, it cannot be prescribed that in the manufacture of a chemical, a certain quantity or proportion of a constituent must be obtained from domestic sources.
A Member cannot apply internal taxes or other internal charges or internal quantitative regulations in a manner so as to afford protection to domestic production. Here, “domestic production” does not mean only the production of that particular product; it also means the production of directly competitive or substitutable products. This means that even if the taxes or charges are applied at the same rate on the imported and like domestic products, the manner of application should not afford protection to domestic production. Clearly, a distinction is to be drawn between a ‘like product’ and a ‘directly competitive or substitutable product’. For example, a country may apply a very high internal tax rate on oranges which is applicable to both imported and domestic products, but if this country does not produce oranges, this tax, in effect, goes to raise the price of only imported oranges. And in this manner, this country may be affording protection to its own production of apples, in so far as oranges are directly competitive or substitutable with apples.
Important Concepts.
Two concepts need elaboration, that is, what constitutes the “like product”, and what are the determinants for concluding that “discrimination’ against an imported product has taken place or that the domestic product has been “protected”.
Like Product: product with similar qualities, not necessarily an identical or equal product. Some of the factors to be considered are: properties, nature, quality and end use. While deciding whether an imported product is a like product in relation to a domestic product, one has to be guided by the basic objective that imported products should not be exposed to more rigorous competitive conditions, and domestic products should not enjoy a more favorable situation of competition.
Sample cases on “like products”
1) The Panel on US-Taxes on Petroleum and Certain Imported Substances (June 1987) examined the differential internal taxation on domestic and imported petroleum and some petroleum products. It found that the domestic products were crude oil, crude oil condensates and natural gasoline, and the imported products were crude oil, crude oil condensates, natural gasoline, refined and residual oil, and certain other liquid hydrocarbon products. It concluded that either the domestic products and imported products were identical or they served substantially identical end uses. The Panel considered them like products.
2) The Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992) considered the exercise tax exemption on wine made from a particular type of grape, i.e., scuppernong grapes. On the complaint of Canada that this practice was inconsistent with Article III, the US argued that the tax provision was uniformly applicable to all wines produced from this particular variety of grape. The Panel examined this question based on the usual criteria of end use, consumer tastes and habits, and the properties, nature and quality of the products, and also on the objective of Article III. The Panel found it relevant to consider whether the differentiation of the products was being made so as to afford protection to domestic production. It observed that tariff classification and tax laws in the US did not claim any public policy purpose for this tax provision except the purpose of subsidizing the small local producers. The Panel concluded that unsweetened still wines were like products and that the differentiation in the tax regulation was affording protection to local products and was therefore inconsistent with Article III.
Discrimination against Imported Products, Protection of Domestic Products:
Discrimination against imported products or protection of domestic products can often be easily detected if done through differential internal taxes or differential internal charges. However, it is not easy if the discrimination or protection is alleged in respect of laws, regulations and requirements affecting sale, purchase, transportation, distribution and use. This matter has been the subject of a large number of disputes in the past. Certain principles have evolved in the course of the consideration of this issue by the various panels. Some of these important principles are given below.
Any requirement on the imported product going beyond the obligation to indicate the origin of the product would be considered inconsistent with Article III 1994 if it dose not also apply to the domestic product. For example, there was a Hawaiian regulation that firms which sold imported eggs had to display a placard stating “we sell foreign eggs”. Australia complained that this requirement affecting sale was inconsistent with Article III.4. The regulation was later withdrawn.
Granting financial facilities, e.g., special credit facilities, tax refunds or tax remission or exemption, for the purchase of domestic products would be considered discriminatory against imported products and as protection of domestic products. For example, the Panel on US Measures Affecting Alcoholic and Malt Beverages (June 1992) examined the US tax measure providing excise tax exemption for domestic producers of beer and wine, which was not available for imported products. The Panel found that the tax law operated to create a lower tax rate on domestic beer and wine than on like imported products and that thus it was discriminatory.
If investors or local industry or importers are obliged to purchase domestic products, there is a denial of opportunity to the like imported products for competing in this particular market. Hence, it would be considered discriminatory against the imported products. For example, the Panel on Canada-Administration of Foreign Investment Review Act (June 1983) examined the Canadian system of written undertakings on purchase and export. Investors were required to give an undertaking to purchase goods of domestic origin. The Panel held that such a requirement clearly meant that imported goods were less favorably treated than domestic goods and that hence, this provision was not consistent with Article III. Further, even if the undertaking was conditional on the goods being competitively available in Canada, the less favorable treatment still held as it resulted in giving preference to domestic products when imported and domestic products were available on equivalent terms.
Imported products cannot be subjected to any special processing requirement which is not obligatory for the domestic product. For example, the UK had a regulation that domestic poultry, after slaughter, could be chilled by any method, whereas imported poultry was to be cooled by only the spin-chill method. The US complained about it and a panel was formed, but the matter got settled in the meantime.
If imported products are required to pass through certain specified wholesale or retail channels or some specified means of transport and if this requirement is not applicable to domestic products, such a requirement will be held to be discriminatory against the imported products. For example, the Panel on US Measures Affecting Alcoholic and Malt Beverages (June 1992) considered a requirement in some states of the US that imported beer and wine be sold only through in-state wholesalers or other middlemen, while some in-state like products were permitted to be sold directly to retailers. The US argued that in-state breweries and wineries bore the same costs as did the wholesalers in respect of record-keeping, auditing, inspection and tax collection. It also said that most in-state beer and wine producers preferred to use wholesalers rather than to market their products directly to retailers. The Panel held that Article III requires relative competition opportunities in the market, irrespective of the actual choices made by enterprises, and that denial of such opportunities creates less favorable treatment to the imported products. This Panel also examined the requirement of some states in the US that alcoholic beverages imported into the state be transported by common carriers authorized to operate as such within the state, whereas in-state producers of alcoholic beverages could deliver their products to customers in their own vehicles. The Panel concluded that such a requirement resulted in less favorable treatment to imported products.
A regulation that domestic products and imported products should both adhere to a minimum-price requirement is not consistent with Article III of GATT 1994, even though the regulation is equally applicable to both domestic and imported products. For example, the Panel on Canada-Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies (February 1992). The Panel was of the opinion that this practice did not necessarily accord equal conditions of competition to imported and domestic products in the sense that the imported product was prevented from being supplied at a price below that of the domestic product.
Important Considerations.
Products with unbound duty: A Member cannot justify a higher internal tax rate on an imported product on the grounds that it could, in any case, apply a higher tariff on the product not subject to tariff binding.
Balancing not allowed: The obligation of national treatment has to be undertaken as applicable to each individual case of imported products. Thus less favorable treatment accorded to an imported product cannot be justified on the grounds that it has received more favorable treatment in another way, or that another product from the exporting country has received more favorable treatment.
Different regional treatment: When a domestic product is given different treatment in different regions of a country, the treatment which is the most favorable among these is to be accorded to the like imported product.
Measure having negligible effect: Some countries, while defending measures which seemingly violate the obligations of national treatment, have argued that the measures had only a negligible effect on trade and that, therefore, they cannot be causing adverse effects on the imported products. In the course of consideration of this issue in the past, the position which is well established by now is that the actual trade effect is not an important point to be considered; what is crucial to the issue is whether competitive conditions for the imported products in relation to domestic products have been adversely affected. A measure is considered inconsistent with Article III of GATT 1994 if it disturbs the competitive conditions of the imported products getting more favorable treatment compared to the imported products may be negligible in quantity or even if the domestic products might not have effectively received any advantage from the measure. Thus, even in the absence of a trade effect, a case of violation could occur.
For example, the Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992) examined a complaint regarding the reduction of excise duty for some domestic products. In the Panel hearing,
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