Trade in Goods Non‐Discrimination Principle: Most Favoured Nation (MFN) and National Treatment in the General Agreement on Tariffs and Trade (GATT) 1994 

MODULE

2

ESTIMATED TIME: 4 hours 

OBJECTIVE OF MODULE 2

Explain the non-discrimination principle embodied in the MFN and National Treatment, in

the context of international trade in goods.

I. INTRODUCTION

Non-discrimination is a fundamental principle of the World Trade Organization (WTO) and is embodied in the:

Most Favoured Nation Treatment; and,

National Treatment.

As you studied in Module 1, multilateral rules and principles were agreed back in 1947 to govern trade in goods

between GATT Contracting Parties. After the conclusion of the Uruguay Round and the entry into force of the

Marrakesh Agreement Establishing the WTO (1 January 1995), the basic principle of non-discrimination

formulated in the GATT 1947 remained fundamentally unchanged. Since 1995, this principle has been

embodied in the updated GATT (called "GATT 1994"), which is now the WTO Agreement governing trade in

goods.

In Module 2, we will explain the non-discrimination principle in the context of trade in goods, incorporated in

Article I (MFN) and in Article III (national treatment) of the GATT 1994. This Module will frequently

make reference to the jurisprudence of the WTO (WTO Panel and Appellate Body decisions) that have dealt

with the interpretation of these principles.

Besides the GATT 1994, the MFN and national treatment principles also apply to trade in services (Articles II

and XVII of the General Agreement on Trade in Services (GATS)) and to trade-related aspects of intellectual

property rights (TRIPS) (Articles 4 and 3 of the TRIPS Agreement). As you will study in Module 6 (GATS), the

national treatment principle applies in the context of trade in services only to the extent that WTO Members

have made explicit commitments. Furthermore, as you will study in Module 7 (TRIPS), the TRIPS Agreement

also incorporates the national treatment principle of some WIPO Conventions.

II. THE MFN PRINCIPLE WITH REGARD TO TRADE IN GOODS

IN BRIEF – THE MFN PRINCIPLE

Pursuant to the MFN principle embodied in the WTO Agreements, WTO Members cannot normally

discriminate between their trading partners. If a Member grants a country an advantage (such as a

lower tariff on one of its products), it must grant this advantage immediately and unconditionally

to all WTO Members.

Members of the WTO can be seen as Members of a club. One of the fundamental rules of the club is that each

Member will grant all other Members the best possible treatment it grants to any trading partner, whether or

not a Member of the club. Hence, each Member is guaranteed to receive the best possible treatment from

each of its fellow-Members (subject to some important exceptions described below). The MFN obligation is

therefore a cornerstone of the GATT 1994 and one of the pillars of the WTO trading system (EC - Tariff

Preferences, Appellate Body Report, para. 101).

Example: The MFN Principle

Assume that in Rauritania – a WTO Member - the MFN tariff applicable to tomatoes from all WTO Members is

10%. Medatia – another WTO Member - is a big tomato producer interested in increasing its exports of

tomatoes to Rauritania.

Imagine that, during a WTO negotiating round, Medatia initiates tariff negotiations on tomatoes with

Rauritania. After long and difficult bilateral meetings, Rauritania agrees to give Medatia a duty free access

(0% tariff) for tomatoes. However, according to the MFN principle, Rauritania should extend the 0% tariff

on tomatoes to all WTO Members. This is because all WTO Members should enjoy the most favourable

treatment for tomatoes granted by Rauritania.

Therefore, for trade in goods, the MFN principle requires each Member to extend to all other WTO

Members treatment no less favourable than the treatment it accords to imports from any other

country - Member or not of the WTO.

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II.A. ARTICLE I:1 OF THE GATT 1994 (MFN PRINCIPLE)

Article I:1 of the GATT 1994 contains the specific rules on MFN treatment for goods:

Article I:1 of the GATT 1994: General MFN Treatment

With respect to customs duties and charges of any kind imposed on or in connection with importation or

exportation or imposed on the international transfer of payments for imports or exports, and with respect to

the method of levying such duties and charges, and with respect to all rules and formalities in connection

with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of

Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product

originating in or destined for any other country shall be accorded immediately and unconditionally to the like

product originating in or destined for the territories of all other CONTRACTING PARTIES.

Besides Article I:1, the MFN principle is also reflected in other GATT 1994 provisions, such as Article IX:1

(marks of origin) and Article XIII (non-discriminatory administration of quantitative restrictions (QRs)). These

provisions will be explained later on in the relevant Modules.

II.B. EXPLANATION AND INTERPRETATION OF ARTICLE I:1 OF THE GATT 1994 (MFN PRINCIPLE)

II.B.1. RATIONALE BEHIND THE MFN PRINCIPLE

Why have governments committed themselves to extending concessions made to one trading partner to all

Members of the WTO? What benefit do they obtain from restricting themselves in this manner?

The object and purpose of the MFN principle is to prohibit discrimination among like products originating in

or destined for different countries (Canada – Autos, Appellate Body Report, para. 84).

Imagine a world with three countries where one country produces and imports the same good from two other

countries. In each of these three countries, one single firm produces and/or exports the relevant good. An

incentive for discrimination will arise if the firm of one of these countries is more efficient and productive than

the other competing firms. The most efficient and productive firm will therefore be able to export/sell its goods

at a lower price than its competitors to/in the importing country. The importing country may therefore want to

impose higher tariffs on the cheaper goods from the country with the most efficient and productive firm in

order to protect its industry. This concern does not arise vis-à-vis the goods imported from the other exporting

country with a less efficient and productive firm. Additionally, this most efficient and productive firm may have

higher returns and the importing country government may want to impose higher tariffs on that firm as this

approach generates higher tariff revenues. With respect to the allocation of world production, this leads to

inefficiencies because the most efficient firm is punished and production is shifted to its less efficient

counterpart in the other exporter country and/or the domestic firm of the importing country. In such a

situation, the MFN principle would make it impossible for the importing country to discriminate among

producers. By doing so, it promotes an efficient allocation of world production.

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Discrimination also increases costs of transaction. Assume each country sets different tariffs for imports

coming from different trading partners. If a company in a country wants to import raw materials or

components for its own production, in order to be competitive, it would have not only to look at the different

prices in different countries but also at the different tariff rates charged on imports by each of these countries.

If a country discriminates among its different trading partners by applying different rates of protection, there

would be different "world prices" (or terms of trade) applying to each. On the other side, countries will have to

spend time and money determining the origin of products, since the tariff and customs rules would vary

according to each country. With MFN, countries have to charge the same duty rates and other customs

formalities to imports from all countries.

The prohibition of discrimination in Article I:1 also serves as an incentive for concessions, negotiated

reciprocally, to be extended to all other Members on an MFN basis (Canada – Autos, Appellate Body Report,

para. 84). Let's assume that Rauritania agrees to decrease its tariff rate for carrots from Medatia (an efficient

producer of carrots) to ten per cent in exchange for Medatia's commitment to reduce its tariff rate for apples.

Rauritania may later agree to apply a lower tariff rate of five per cent to carrots originating from Vanin. As a

result, firms in Rauritania will start importing carrots from Vanin, instead of Medatia. In the absence of the

MFN rule, the benefits obtained by Medatia will be eroded via trade diversion to Vanin. As a consequence,

Medatia would have no incentive to engage in negotiations and the scope of trade deals would be accordingly

diminished. Instead, with MFN, the lower tariff rates provided by Rauritania to Vanin will be extended to

Medatia, so that Medatia's carrots will also benefit from the lower tariff rate (five per cent).

MFN tempers the potential for concession diversion in two ways. Firstly, by requiring non-discriminatory

behaviour by Rauritania to Medatia, it ensures that the market access bargained by Medatia is not diverted

entirely to one of its competitors at a later stage. Secondly, if Rauritania is bound by MFN, any concession it

offers to Vanin must be extended to all Vanin's competitors. Any further trade deal negotiated by Rauritania

will amount to further reciprocal liberalization. This removes Rauritania's incentive to negotiate subsequently,

encouraging this country to make an optimal deal in the first place.

Based on: World Trade Organization (WTO), World Trade Report 2007, Geneva: WTO, p. 133 – 137.

Rationale Behind the MFN Principle

The MFN principle works to:

Maximize efficiency.

Minimize transaction costs (related rules for the issuance of certificates of origin, direct

shipment requirements and other relevant administrative producers can impose significant costs on

both enterprises and governments, but, in accordance with MFN countries apply the same rules to

imports from all countries).

Promote further reciprocal liberalization (this benefits particularly small developing countries,

which benefit from the most favoured treatment provided to other Members).

Minimize costs of trade negotiations (negotiating one multilateral agreement instead of several

bilateral agreements).

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TO KNOW MORE... HISTORY OF THE MFN CLAUSE

The inclusion of clauses relating to non-discriminatory treatment in trade agreements can be traced back to

the 12th century, with the first reference to the phrase "MFN" appearing at the end of the 17th century. The

emergence of the concept of non-discrimination stemmed from the decline in mercantilism and from a desire

to link commercial treaties through time and among states. In the intervening period up until the formation

of the GATT, bilateral and plurilateral MFN trade deals were conducted utilizing both the conditional form of

MFN, where concessions were granted on the condition of receiving adequate compensation, and the

unconditional form, where concessions were granted without reciprocal compensation.

The wave of liberalism that swept Europe in the second half of the 19th century engendered widespread use

of the unconditional form of MFN. The United States, however, being a relative newcomer to international

trade, retained the conditional form at that time. Following the end of the First World War, the United States

experienced a considerable increase in demand for its exports from Europe. Therefore, in the 1920s US MFN

policy changed to that of unconditional MFN in a bid to entice other countries to do the same with respect to

the United States, thus reducing discrimination against US exports. The modern day version of MFN,

enshrined in WTO [law and] jurisprudence, is a direct descendant of the [unconditional] MFN clauses in

bilateral agreements between the United States and its trading partners.

World Trade Organization (WTO), World Trade Report 2007, Geneva: WTO, p. 132.

II.B.2. SCOPE OF APPLICATION OF THE MFN RULE: DE JURE & DE FACTO DISCRIMINATION

The jurisprudence has interpreted that a measure may be discriminatory not only in law (de jure), but

also in fact (de facto). A measure discriminates de jure when it is clear from the wording of the legal

instrument that it provides an advantage to a product from a Member or non-Member, without extending such

advantage to like products from all WTO Members. When the discrimination does not appear on the text or

face of the legal instrument, it can still be de facto, or in practice, discriminatory. De facto discrimination

occurs when an apparently neutral legal instrument, is in effect or in fact, discriminatory. To establish de facto

discrimination, all the facts relating to the application of the measure must be reviewed. For example, imagine

Medatia, a WTO Member, enacts a measure whereby imported milk from cows raised in pastures above 1000

feet pays a higher tariff than imported milk from cows raised in pastures at the sea level. Suppose now that

Tristat, another WTO Member, is the only country that exports to Medatia milk from cows raised in pastures

above 1000 feet, while other WTO Members export to Medatia milk from cows raised in pastures at the sea

level.

In Canada-Autos, the Appellate Body ruled that the scope of Article I:1 of the GATT 1994 covers both de jure

and de facto discrimination. The measure at issue was Canada's import duty exemption granted to motor

vehicle imports which met certain requirements (See Case Study 1).

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II.B.3. THE MFN PRINCIPLE: THREE-TIER TEST

The MFN Principle: Three-Tier Test

The analysis of inconsistency of a measure with the MFN principle is a three-tier test. One needs to check

these three elements to find an inconsistency:

Any advantage, favour, privilege or immunity covered by Article I:1 of the GATT 1994;

Like products; and,

The advantage at issue is not granted immediately and unconditionally to the like products

concerned.

a. Any Advantage, Favour, Privilege or Immunity covered by Article I:1

Article I:1 covers a broad range of measures in relation to exportation and importation as well as internal

measures. Such measures include the following:

Customs duties;

any kind of charges imposed on importation or exportation;

any kind of charges imposed in connection with importation or exportation;

any charges imposed on the international transfer of payments for imports and exports;

the method of levying such duties and charges;

all rules and formalities in connection with importation and exportation;

internal taxes or other internal charges (covered in Article III.2);

all laws, regulations and requirements affecting internal sale, offering fore sale, purchase,

transportation, distribution or use of any product (covered in Article III.4).

Both Panels and the Appellate Body have interpreted Article I:1 as covering a wide range of measures. In

Canada – Autos, the Appellate Body stated that the wording of Article I:1 refers not to some advantages

granted with respect to the subjects that fall within the scope of Article I:1, but to "any advantage"; not to

some products, but to "any product'; and not to like products from some other Members, but to like products

originating in or destined for "all other" Members (See Case Study 1).

NOTE

Recall that these advantages not only concern those granted by WTO Members to other Members, but also

those granted by WTO Members to non-WTO Members. Hence the use of the broader term "any other

country" in Article I:1.

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b. Like Products

As explained by the Appellate Body in EC – Bananas III, the essence of the MFN obligation is that "like

products" should be treated equally, irrespective of their origin (EC – Bananas III, Appellate Body

Report, para. 190). This means that products which are not "like products" may be treated differently. The

term "like products" is not defined in the GATT 1994, although it is used in other provisions both in the GATT

1994 and in other WTO Agreements. For example, the concept of "like products" appears in Articles II, III, VI,

IX, XI, XIII, XVI and XIX of the GATT 1994. As it will be explained further on, the concept of "like products"

may have different meanings depending on its context in the various provisions of the WTO Agreements (see

the "accordion analogy" below).

GATT/WTO case law has set up four criteria that should be considered in determining whether the

imported and domestic products are "like products". All these criteria (except for "the customs

classification of the product" - see box below) were taken from the Report of the Working Party on Border Tax

Adjustments adopted by the GATT Contracting Parties in 1970. As we will see, such criteria have been

developed mainly by WTO adjudicating bodies in the context of Article III (National Treatment). In

EC - Asbestos, the Appellate Body emphasized that these four criteria do not constitute a "closed list" and

that they are simply tools to assist in the task of sorting and examining the relevant evidence (EC - Asbestos,

Appellate Body Report, paras 101-103).

Criteria applied in the analysis of "Like Products"

The four criteria employed by the GATT 1994/WTO adjudicating bodies in determining "like products" under

Article I:1 are:

1. The product's end uses

2. Consumers' tastes and habits

3. The product's nature, properties and quality (physical characteristics)

4. The customs classification of the products

Example: Criteria applied in the analysis of "Like Products" under Article I:1 (MFN Principle)

As mentioned above, the concept of "like products" has been subject to interpretation by some GATT

Working parties and panels. In Spain - Tariff Treatment Of Unroasted Coffee, a GATT Panel concluded that

various types of unroasted coffee falling into different tariff classifications and thus, under different tariff

rates under the Spanish tariff regime were ''like'' products (Spain - Tariff Treatment Of Unroasted Coffee,

GATT Panel Report, paras. 4.6-4.9). The Panel applied three of the four criteria mentioned above to

the various types of unroasted coffee to determine if they constitute "like products".

With respect to the physical characteristics of the products, the Panel examined if the organoleptic

differences resulting from geographical factors, cultivation methods, the processing of the beans, and the

genetic factor were sufficient reasons to allow for a different tariff treatment. It pointed out that it was not

unusual in the case of agricultural products that the taste and aroma of the end-product would differ

because of one or several of the above-mentioned factors.

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The Panel furthermore found relevant to its examination of the matter that unroasted coffee was mainly, if

not exclusively, sold in the form of blends, combining various types of coffee, and that coffee in its end-use,

was universally regarded as a well-defined and single product intended for drinking. The Panel noted that no

other GATT contracting party applied its tariff regime - customs classification of the product - in respect

of unroasted, non-decaffeinated coffee in such a way that different types of coffee were subject to different

tariff rates. Based on this reasoning, the Panel concluded that the various types of unroasted coffee

were ''like'' products within the meaning of Article I:1 of the GATT.

c. The Immediate and Unconditional Granting of the Advantage to the Like Products concerned

The third element in the three-tier test is the granting of the advantage "immediately and unconditionally".

This means that once a WTO Member has granted an advantage to imports from any country, it must

immediately and unconditionally grant that advantage to imports of like products from all WTO

Members.

In Indonesia – Autos, the measure at issue was "The 1993 Programme" that provided import duty reductions

or exemptions on imports of automotive parts based on the local content per cent; and "The 1996 National Car

Programme" that provided various benefits such as luxury tax exemption or import duty exemption to

qualifying (local content etc.) cars or Indonesian car companies. In this case the Panel held that, according to

GATT/WTO case-law, the right of Members "cannot be made conditional on any criteria not related to the

imported product itself". The existence of such conditions is inconsistent with the provisions of Article I:1

which require that tax and customs duty advantages accorded to products of one Member be accorded to

imported like products from other Members "immediately and unconditionally" (Indonesia – Autos, Panel

Report, paras. 14.145-14.147).

II.C. EXCEPTIONS

II.C.1. EXCEPTIONS TO THE PROVISIONS CONTAINED IN THE WTO AGREEMENTS –INCLUDING THE MFN PRINCIPLE

There are a number of provisions that allow WTO Members to derogate from most or some provisions

contained in the WTO Agreements, including the MFN principle. These will be covered in detail in Modules 8

(Exceptions) and 9 (Development Dimension). They include:

General exceptions (Article XX of the GATT 1994);

Security exceptions (Article XXI of the GATT 1994);

Balance of payment exceptions and temporary application of quantitative restrictions in a

discriminatory manner (Articles XII, XVIII.B, and XIV of the GATT 1994);

Waivers (Article IX:3 of the Agreement Establishing the WTO); and,

A number of provisions on special and differential treatment, which can be found throughout

the WTO Agreements.

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II.C.2. EXCEPTIONS TO THE MFN PRINCIPLE

The specific exceptions to the MFN principle are listed below. The most important exceptions are the first two

related to Regional Integration and the "Enabling Clause".

a. Regional Integration (Article XXIV of the GATT 1994)

Article XXIV of the GATT 1994 allows a WTO Member to grant more favourable treatment to its trading

partners within a customs union or a free trade area without extending such treatment to all WTO Members,

subject to certain conditions. This exception will be explained in detail in Module 8 (Exceptions).

b. 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (the "Enabling Clause")

The Enabling Clause also allows WTO Members to depart from the MFN principle. This Clause "enables"

developed country Members to derogate from the MFN principle in order to grant preferential tariff treatment

to imports from developing country Members under certain conditions. The Enabling Clause also "enables"

developing country Members to depart from the MFN principle to negotiate regional agreements among them.

The Enabling Clause will be explained in detail in Module 9 (WTO Development Dimension).

c. Historical Preferences (Article I:2 – I:4 of the GATT 1994)

Very few "historical preferences" exist today. The few preferences which derogate from the MFN principle and

which can be maintained, are remnants of the particular situations which existed back in the GATT 1947. For

this reason they are called "historical" preferences. It should be emphasized that these preferences were

significant when the GATT 1947 was negotiated, but their importance has faded over the years.

d. Frontier Traffic (Article XXIV:3 of the GATT 1994)

Advantages accorded by Members to "adjacent countries" in order to facilitate frontier transactions constitute

one authorized derogation to the MFN principle. It should nevertheless be emphasized that this derogation

refers to the facilitation of transactions in the vicinity of the frontier and cannot cover a trade agreement

governing the entire territories of two neighbouring countries. As with the historical preferences, the economic

impact of this derogation is very limited.

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ILLUSTRATION – MFN PRINCIPLE FOR GOODS

SCENARIO

Let us assume that Vanin, Tristat and Medatia are WTO Members. In the past, Vanin (a developed country

Member) used to classify all beers under the same tariff heading subject to a customs duty of 15 per cent.

Recently, Vanin authorities enacted a new customs law which reclassifies beers under different tariff

sub-headings, according to their level of alcohol. According to this law, Vanin applies different customs

duties: a 10 per cent ad valorem customs duty on beers with a level of alcohol below three per cent and

a 25 per cent ad valorem customs duty on beers with a level of alcohol equal or above three per cent.

Vanin applies these customs duties to all countries, except to Medatia, to which it applies a two per cent

ad valorem customs duty on beers with a level of alcohol below three per cent and a ten per cent

ad valorem customs duty on beers with a level of alcohol equal or above three per cent, pursuant to a

free trade area formed with this country.

Vanin does not produce beer. Instead, it imports this product from many WTO Members. However, beer

with a level of alcohol equal or above three per cent is only imported from Tristat and Medatia. Tristat

believes that Vanin's new customs law violates the MFN principle.

The chart below summarizes the customs rates applied by Vanin:

Good: Beer Countries exporting Customs Rate Customs Rate

beer to Vanin applicable to all applicable to

WTO Members Medatia

< 3% alcohol Many WTO Members 10% 2%

≥ 3% alcohol Only Tristat and

Medatia

25% 10%

QUESTION

Assuming you were an expert on WTO law, what would you advise Tristat to argue before a WTO Panel?

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PROPOSED ARGUMENT

TRISTAT, the complainant, may argue as follows:

THE MFN PRINCIPLE

The MFN principle laid down in Article I:1 of the GATT 1994 requires Vanin to extend, immediately and

unconditionally, any advantage that it gives to products imported from any Member (including Medatia) or

non-Member to ''like'' products imported from Tristat. According to Article I:1, Tristat needs to

demonstrate the fulfilment of three elements: 1) the application of the lower customs duty constitutes

an advantage, favour, privilege or immunity covered by Article I:1; 2) beer with a level of alcohol below

three per cent and beer with a level of alcohol equal or above three per cent are ''like products'' under

Article I:1; and, 3) the advantage granted to imported beers with a level of alcohol below three per cent

(lower customs duty) is not being extended, immediately and unconditionally, to beers with a level of alcohol

equal or above three per cent imported from Tristat.

ADVANTAGE OF THE TYPE COVERED BY ARTICLE I:1

Tristat will not find it difficult to demonstrate that the advantages granted by Vanin through lower customs

duties are covered by Article I:1, which expressly includes "customs duties".

LIKE PRODUCTS

Tristat could argue that beers with a level of alcohol below 3 per cent and beers with a level of alcohol equal

or above three per cent are ''like products'' within Article I:1 by proving that all these beers share

substantially the same physical characteristics, end-uses, are perceived by consumers as like products, and

that WTO Members classify them under the same tariff headings.

GRANTING OF THE ADVANTAGE IMMEDIATELY AND UNCONDITIONALLY TO LIKE PRODUCTS

Tristat may argue that the lower customs duty of ten per cent for beers with a level of alcohol below three

per cent is not extended to beers with a level of alcohol equal or above three per cent, which is subject to a

customs duty of 25 per cent.

DE FACTO DISCRIMINATION

Vanin might raise a rebuttal, claiming that its measure does not discriminate between like products, but

instead applies different customs duties to different products.

The counter-argument for Tristat could be that the Appellate Body has ruled that Article I:1 covers both

de jure and de facto discrimination. Tristat could argue that Vanin's customs law is de facto discriminatory

since it has the effect of discriminating against beer with a level of alcohol equal or above three per cent

from Tristat by applying a higher customs duty to this product, while applying a lower customs duty to beer

with a level of alcohol below three per cent (a "like" product). Except for Medatia, Tristat is the only WTO

Member that exports beer with a level of alcohol equal or above three per cent to Vanin.

ARTICLE XXIV OF THE GATT 1994 –REGIONAL INTEGRATION

Regarding the preferential treatment provided to imports of beers from Medatia, Vanin may argue that such

treatment is justified by Article XXIV, which enables WTO Members to depart from the MFN principle to form

customs unions and free trade areas subject to certain conditions.

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CASE STUDY

CASE STUDY 1: CANADA - AUTOS

(Canada – Certain Measures Affecting the Automotive Industry)

(DS139, DS142)

PARTIES AGREEMENTS TIMELINE OF THE DISPUTE

GATT 1994 Establishment of

Panel

1 February 1999 Complainants Japan,

European

Union

General Agreement on

Trade in Services (GATS)

Circulation of

Panel Report

11 February 2000

Circulation of

Appellate Body

Report

31 May 2000 Respondent Canada Agreement on Subsidies

and Countervailing

Measures (SCM Agreement)

Adoption 19 June 2000

Table 1: Canada – certain measures affecting the automotive industry

IN A NUTSHELL

Canada granted an import duty exemption for motor vehicle imports and imported motor vehicle parts and

materials by certain manufacturers which met the Canadian Value Added ("CVA") requirements and certain

production to sales ratio requirements. Other manufacturers which did not meet these requirements were

subject to a 6.1 per cent import duty.

The Panel found that Canada violated Article I:1 of the GATT 1994 by granting the import duty exemption to

motor vehicles from some countries but not to motor vehicles from all other WTO Members. On appeal,

Canada argued that Article I:1 did not prohibit the imposition of "origin-neutral terms and conditions on

importation that apply to companies as opposed to the products they import".

The Appellate Body upheld the Panel's finding that the duty exemption was inconsistent with the MFN

treatment obligation under Article I:1 on the grounds that Article I:1 covers not only de jure but also de

facto discrimination and that the duty exemption at issue was in practice given only to the imports from a

small number of countries in which an exporter was affiliated with eligible Canadian manufacturer/importers.

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SUMMARY OF THE KEY FINDINGS OF THE PANEL/APPELLATE BODY

1. The object and purpose of

Article I:1 – the MFN clause

(Appellate Body Report,

para. 84)

To prohibit discrimination among like products originating in or

destined for different countries.

Serves as an incentive for concessions, negotiated reciprocally,

to be extended to all other Members on an MFN basis.

2. The scope of Article I:1

(Appellate Body, para. 79)

Covers both de jure and de facto discrimination

Not restricted only to cases in which the failure to accord an "advantage"

to like products of all other Members appears on the face of the measure,

or can be demonstrated on the basis of the words of the measure.

Article I:1 also applies to measures which, on their face, are "origin-

neutral".

3. How was de facto

discrimination found in this

case? (Appellate Body Report,

para. 85)

The measure maintained by Canada accorded the import duty exemption

to certain motor vehicles entering Canada from certain countries. These

privileged motor vehicles were imported by a limited number of

designated manufacturers who were required to meet certain

performance conditions. In practice, this measure did not accord the

same import duty exemption immediately and unconditionally to like

motor vehicles of all other Members.

4. Article XXIV – an exception

to Article I:1 (Panel Report,

paras. 10.52-10.57)

Canada invoked an Article XXIV exception with respect to a certain import

duty exemption, found to be inconsistent with Article I of the GATT 1994.

The Panel rejected this defence because, on the one hand, Canada was

not granting the import duty exemption to all North American Free Trade

Agreement (NAFTA) manufacturers and because, on the other hand,

manufacturers from countries other than the United States and Mexico

were being provided duty-free treatment. Canada did not appeal this

finding of the Panel.

Table 2: Summary of the key findings of the panel/appellate body

EXERCISES

1. Art. I.1 of the GATT 1994 provides that: "With respect to customs duties … any advantage … granted by

any Member to any product originating in or destined for any other COUNTRY shall be accorded

immediately and unconditionally."

Why did the drafters of Article I.1 of the GATT 1994 refer to "any other COUNTRY" and not "any other

MEMBER"?

2. What are the main objectives of the MFN principle?

3. Explain the three-tier test applicable for determining a violation of Article I:1 of the GATT 1994.

4. Which is the criteria to determine whether two products are "like products"?

5. Which types of advantages are covered by the MFN principle?

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III. THE NATIONAL TREATMENT PRINCIPLE WITH REGARD TO TRADE IN GOODS

IN BRIEF

The National Treatment Principle prohibits a Member from favouring its domestic products over the imported

products of other WTO Members.

III.A. ARTICLE III OF THE GATT 1994 (NATIONAL TREATMENT PRINCIPLE)

In this section, we will explain the national treatment principle, which constitutes the second component of the

non-discrimination pillar of the WTO. The national treatment principle for goods is provided in Article III of the

GATT 1994. The relevant parts of Article III are paragraphs 1, 2 and 4 as well as the explanatory Ad Note to

Article III, second sentence.

Article III of the GATT 1994: National Treatment on Internal Taxation and Regulation

General Principle

6. Members 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.

Internal Taxation

7. The products of the territory of any Member imported into the territory of any other Member 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 Member shall otherwise

apply internal taxes or other internal charges to imported or domestic products in a manner contrary to

the principles set forth in para. 1.

Ad Note to Article III:2, second sentence

8. A tax conforming to the requirements of the first sentence of para. 2 would be considered to be

inconsistent with the provisions of the second sentence only in cases where competition was 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.

15

Internal Regulation

9. The products of the territory of any Member imported into the territory of any other Member shall be

accorded treatment no less favourable than that accorded to like products of national origin in respect

of all laws, regulations, transportation, and requirements affecting their internal sale, offering for sale,

purchase, transportation distribution or use. The provisions of this paragraph shall not prevent the

application of differential internal transportation charges which are based exclusively on the economic

operation of the means of transport and not on the nationality of the product.

Difference Between the National Treatment Principle and the MFN Principle

According to the national treatment principle, each Member shall treat imports no less favourably than it

treats like domestically produced goods. Whilst the MFN principle seeks to ensure that a WTO

Member does not discriminate between like products originating in, or destined for, other WTO

Members, the national treatment principle addresses the non-discriminatory treatment to be

applied to imported and domestic like products.

III.B. EXPLANATION AND INTERPRETATION OF THE NATIONAL TREATMENT PRINCIPLE

III.B.1. RATIONALE BEHIND ARTICLE III

What would happen if a government imposed an internal regulation that costs foreign competitors much more

than domestic industries to meet?

Negotiated tariff bindings (the maximum level of customs duty to be levied on products imported into a

Member) are effective only if Members cannot undermine their market access commitments by using other

internal measures. But a large number of internal measures, sometimes not directly trade-related, can have

effects that are very similar to tariffs and the use of such policies can therefore offset tariff concessions.

16

Assume a country binds itself not to increase tariffs on bicycles beyond 15 per cent. An internal tax which

applies only to imported products would improve the competitiveness of domestic producers of bicycles with

respect to foreign producers and the market access that foreign governments had expected to gain through

tariff bindings would be partly or entirely offset. Therefore, goods that can enter a country's territory thanks to

reduced border barriers, such as tariffs, should not be discriminated against once they have entered that

territory.

The purpose of Article III of the GATT 1994 is therefore to prohibit or limit the use of trade restricting or

distorting trade policy measures by requiring non-discriminatory treatment between imported and domestic

goods. In this regard, in examining the consistency of the Japanese taxation on liquor products with

Article III:2, the Appellate Body in Japan - Alcoholic Beverages II explained that the purpose of Article III is to

avoid protectionism in the application of internal tax and regulatory measures. Towards this end, Article III

obliges WTO Members to provide equality of competitive conditions for imported products in relation to

domestic products (Japan - Alcoholic Beverages II, Appellate Body Report, pages 16-17).

Rationale Behind the National Treatment Principle

The national treatment principle embodied in Article III of the GATT 1994 works to:

Avoid protectionist measures.

Maintain equality of competitive conditions.

Protect tariff bindings.

III.B.2. SCOPE OF COVERAGE

a. De Jure and De Facto Discrimination

As with the MFN principle, the scope of the national treatment principle also covers both de jure

and de facto discrimination. A measure is de jure discriminatory when discriminatory treatment between

imported and domestic like products is clear from the wording of the legal instrument. When the

discrimination is not clear on the text or face of the legal instrument, it can still be de facto, or in practice,

discriminatory. In the case of the national treatment principle, de facto discrimination occurs when a legal

instrument in effect or in fact favours domestic products over imported like products. As explained when

referred to the MFN principle, to establish de facto discrimination, all the facts relating to the application of the

measure must be reviewed.

Cases where de facto discrimination was found are Japan – Alcoholic Beverages II, Korea - Alcoholic Beverages

and Chile – Alcoholic Beverages. These cases involved internal measures which, although not making an

explicit reference to the origins of products, had the effect of affording protection to domestic products

vis-à-vis "like" or "directly competitive or substitutable" imported products.

17

Example: De Facto Discrimination under Article III of the GATT 1994

In Chile - Alcoholic Beverages, the Appellate Body held that the cumulative consequence of the New Chilean

System was that approximately 75 per cent of all domestic production of the distilled alcoholic beverages at

issue would be located in the fiscal category with the lowest tax rate, whereas approximately 95 per cent of

the directly competitive or substitutable imported products would be found in the fiscal category subject to

the highest tax rate (Chile - Alcoholic Beverages, Appellate Body Report, para. 67).

b. Applies Only to Internal Measures

The national treatment obligation only applies to internal measures as opposed to border

measures. Distinguishing between an internal measure and a border measure may not always be easy. The

Ad Note to Article III of the GATT 1994 clarifies that an internal measure may nevertheless be

applied at the border on imported goods.

Ad Note to Article III

Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred to in

paragraph 1, which applies to an imported product and to the like domestic product and is collected or

enforced in the case of the imported product at the time or point of importation, is nevertheless to be

regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred

to in paragraph 1, and is accordingly subject to the provisions of Article III.

In Argentina - Hides and Leather, the Panel addressed the question whether an Argentinean value added tax

(VAT), was an "internal measure" within the meaning of Article III:2 of the GATT 1994. Based on the text of

Article III and its Ad Note, the Panel found that such measure was indeed an internal measure within the

meaning of Article III inter alia because the VAT, although applied at the border, was chargeable to an internal

transaction. Furthermore, in accordance to the Ad Note to Article III, the fact that the VAT was collected "at

the time or point of importation" did not preclude it from being characterized as an "internal tax measure"

under Article III:2 of the GATT 1994 (Argentina - Hides and Leather, Panel Report, paras. 11.145).

c. Bound and Unbound Measures

The national treatment principle extends to bound and unbound measures. In this regard, the

Appellate Body in Japan-Alcoholic Beverages II, held that Article III is a general prohibition on the use of

internal taxes and other internal regulations that clearly extends to products not bound under Article II -

Schedule of Concessions (for trade in goods, in general, the Schedules of concessions consist of a list of

products for which a bound tariff has been agreed by the Member concerned – the Schedules will be studied in

Module 3) (Japan-Alcoholic Beverages II, Appellate Body Report, p. 17).

18

III.B.3. INTERPRETATION OF ARTICLE III

a. Article III:1 General Obligation

The general principle set out in Article III:1 informs the rest of Article III and serves as a guide to

understanding and interpreting the specific obligations contained in the other paragraphs of

Article III. However, as we will see below, Article III:1 applies to the first and second sentences of

Article III:2 and Article III:4 in different ways.

In Japan - Alcoholic Beverages II, the Appellate Body examined the Panel's finding of inconsistency of the

Japanese Liquor Tax Law with both sentences of Article III:2. The Appellate Body found that Article III:1

constitutes part of the context for Article III:2. In this regard, it stated that Article III:1 articulates a general

principle that internal measures should not be applied so as to afford protection to domestic production, which

informs the rest of Article III. The purpose of Article III:1 is to establish this general principle as a guide to

understanding and interpreting the specific obligations contained in Article III:2 and in the other paragraphs of

Article III, while respecting, and not diminishing, the meaning of the words used in those other paragraphs

(Japan - Alcoholic Beverages II, Appellate Body Report, pages 16-18 – see Case Study 2).

b. Article III:2 - Internal Taxation

Article III:2 applies the general non-discrimination principle set out in paragraph 1 to internal taxation. WTO

jurisprudence has distinguished two levels of obligations regarding internal taxation depending on

whether imported and domestic products can be considered "like products" or "directly

substitutable products". In this respect, the first sentence of paragraph 2 deals with the internal taxation of

"like products" while the second sentence (by cross reference with the relevant Ad Note) deals with the internal

taxation of "directly competitive or substitutable products" (See Japan-Alcoholic Beverages II – Case Study 2).

If the products under consideration cannot be considered "like products" within Article III:2, first sentence, it

can still be further examined whether they may be "directly competitive or substitutable" according to

Article III:2, second sentence, given the broader scope of the latter.

1. ARTICLE III:2 - FIRST SENTENCE

Two - tier test under Article III:2 - First Sentence

The analysis of consistency of a measure with the first sentence of Article III:2 constitutes a two-tier test.

One needs to check the following two elements to find an inconsistency:

The imported and domestic products are like products; and,

The imported products are taxed in excess of the domestic products.

The requirement to meet the two-tier test mentioned above was confirmed by the Appellate Body, among

other cases, in Japan - Alcoholic Beverages II, Korea - Alcoholic Beverages and Chile – Alcoholic Beverages.

19

a. The imported and domestic products are "like products"

As indicated above while explaining the MFN principle (see Section II.B.3), WTO adjudicating bodies have

mainly analysed the concept of like products in the context of Article III:2 and III:4 of the GATT 1994.

Criteria used for the determination of "Like Products"

The four criteria employed by the GATT/WTO jurisprudence in determining "likeness" under Article III:2 first

sentence are the following:

1. The product's end uses

2. Consumer tastes and habits

3. The product's properties, nature and quality

4. The customs classification of the product

As mentioned earlier, these four criteria were analysed by the Appellate Body for the first time in

Japan-Alcoholic Beverage II, where it referred to the Working Party on Border Tax Adjustment, which

developed the basic approach for interpreting "like or similar products" (criteria 1, 2 and 3 of the box above).

In this dispute, the Appellate Body held that the interpretation of the term ''like product'' should be examined

on a case-by-case basis. In relation to the second sentence dealing with "directly competitive or substitutable

products", the Appellate Body further ruled that the term "like product" under the first sentence of

Article III:2 should be construed narrowly (Japan-Alcoholic Beverage II, Appellate Body Report,

pages 19-20).

As mentioned above, the Appellate Body has stated that these criteria do not constitute a "closed list" and that

they are simply tools to assist in the task of sorting and examining the relevant evidence. The adoption of a

particular framework to aid in the examination of evidence does not dissolve the duty or the need to examine,

in each case, all of the pertinent evidence (EC - Asbestos, Appellate Body Report, paras. 101-103).

b. The imported products are taxed "in excess of" the domestic products

The taxes levied on imported products cannot exceed those levied on like domestic products.

According to the Appellate Body in Japan-Alcoholic Beverages II, even the smallest amount of "excess" would

be too much. The prohibition of discriminatory taxes in Article III:2, first sentence, is not conditional on a

"trade effects test’" nor is it qualified by a de minimis standard. Thus, the slightest margin of excessive taxing

will constitute an infringement, even if the margin is de minimis (Japan-Alcoholic Beverages II, Appellate Body

Report, page 25).

2. ARTICLE III:2 - SECOND SENTENCE

As mentioned above, if a product does not meet the narrow definition of "like product", it may still be

"directly competitive or substitutable". Therefore, if there is no violation of Article III:2, first sentence,

one must still consider if there is an infringement of Article III:2, second sentence.

20

In Japan – Alcoholic Beverages II, the Appellate Body explained the three-tier test to be used under

Article III:2, second sentence, and distinguished this test from the one applicable under the first sentence.

This distinction, in the view of the Appellate Body, is a result of the explicit reference to Article III:1 in the

second sentence of Article III:2. Accordingly, the Appellate Body found that three separate issues must be

addressed to determine whether an internal tax measure is inconsistent with Article III:2, second sentence

(Japan – Alcoholic Beverages II, Appellate Body Report, page 26).

Three - tier test under Article III:2- Second Sentence

The analysis of consistency of a measure with the second sentence of Article III:2 constitutes a three-tier

test. One needs to check the following three elements to find an inconsistency:

The imported and domestic products are directly competitive or substitutable;

the domestic and imported products are not similarly taxed; and,

the dissimilar taxation is applied to so as to afford protection to domestic production.

a. The imported and domestic products are "directly competitive or substitutable"

The second sentence of Article III:2 applies to competitive or directly substitutable products. This is a much

broader concept than likeness in the first sentence: whereas the first sentence applies only to

products that are perfectly substitutable, the second sentence is broad enough to include products

that are imperfectly substitutable. In Korea - Alcoholic Beverages, the Appellate Body concluded that the

term "like products'' should be considered as a subset of "competitive or substitutable product" under the

second sentence of that Article (Korea - Alcoholic Beverages, Appellate Body Report, para. 118).

In interpreting the term "directly competitive or substitutable products", the Appellate Body in Japan - Alcoholic

Beverages II found that it did "not seem inappropriate" to consider the competitive conditions in the relevant

market, nor did it seem inappropriate to examine elasticity of substitution as one means of examining the

relevant markets (Japan - Alcoholic Beverages II, Appellate Body Report, p. 25). In addition, in

Korea - Alcoholic Beverages, the Appellate Body considered that competition in the market place is a dynamic,

evolving process and thus, the concept of "directly competitive or substitutable" implies that the competitive

relationship between products is not to be analyzed exclusively by reference to current consumer preferences

(Korea - Alcoholic Beverages, Appellate Body Report, para. 114).

b. The domestic and imported products are "not similarly taxed"

In the first sentence, even the slightest difference in tax between imported and domestic products will lead to

inconsistency with the national treatment obligation. This is not the case with regard to the second sentence

where the requirement is that the product must be "similarly taxed". In Japan-Alcoholic Beverages II, the

Appellate Body interpreted the term "not similarly taxed" as requiring taxation exceeding the de minimis

threshold. Accordingly, the difference in tax must be more than de minimis to constitute an

infringement of the national treatment obligation in Article III:2 second sentence (Japan-Alcoholic

Beverages II, Appellate Body Report, pages 26-27).

21

c. The dissimilar taxation is applied "so as to afford protection" to domestic production

If it is established that a dissimilar taxation is applied, it must thereafter be established that this was applied

"so as to afford protection" to domestic production. Thus, although "so as to afford protection" needs not to be

established independently in a finding of a violation with Article III:2, first sentence, it shall be established

under the second sentence of that Article.

The Appellate Body stated in Japan - Alcoholic Beverages II that an examination of whether dissimilar taxation

has been applied "so as to afford protection" requires a comprehensive and objective analysis of the structure

and application of the measure in question on domestic production as compared to imported products. The

very magnitude of the tax differentials may be evidence of the protective application of a national fiscal

measure.

The Appellate Body has also held that the subjective intent of legislators and regulators of a particular

measure, in this case reducing the consumption of alcoholic beverages, is irrelevant for ascertaining whether a

measure is applied "so as to afford protection" (Japan - Alcoholic Beverages II, Appellate Body Report,

pages 27-31). In a subsequent dispute, Chile - Alcoholic Beverages, the Appellate Body refused to accept

explanations of policy objectives which were not ascertainable from the objective design, architecture and

structure of the measure (Chile - Alcoholic Beverages, Appellate Body Report, para. 71).

Example: Measure Applied "so as to afford protection" under Article III:2, Second Sentence

In Korea - Alcoholic Beverages, the Appellate Body held that because there were virtually no imported sochu

in Korea "the beneficiaries of this internal tax structure are almost exclusively domestic producers".

Therefore, the tax operated in such a way that the lower tax brackets covered "almost exclusively" domestic

production, whereas the higher tax brackets embraced "almost exclusively" imported products. In light of

the foregoing, the Appellate Body upheld the Panel's finding that the Korean measures were applied "so as

to afford protection" to domestic production (Korea - Alcoholic Beverages, Appellate Body Report,

paras. 150 - 154).

c. Article III:4 - Internal Laws, Regulations and Requirements Related to Internal Sale, Transportation, Distribution or Use

The national treatment obligation in Article III:4 of the GATT 1994 is concerned with measures affecting the

internal sale, offering for sale, purchase, transportation, distribution, or use of the imported product.

Three-tier test under Article III:4

The analysis of consistency of a measure with Article III:4 constitutes a three-tier test. One needs to check

the following three elements to find an inconsistency:

The imported and domestic products at issue are like products;

The measure at issue is a law, regulation, or requirement affecting their internal sale, offering for

sale, purchase, transportation, distribution, or use; and,

The imported products are afforded less favourable treatment than like domestic products.

22

These three elements were explained inter alia by the Appellate Body in Korea - Various Measures on Beef and

EC-Asbestos. See Case Study 3.

a. The imported and domestic products are "like products"

The scope of likeness in Article III:4 has been found by the Appellate Body to be somewhat wider than that in

the first sentence of Article III:2. This is because the scope of the first sentence of Article III:2 must be read

in light of its relationship with the second sentence of Article III:2, something that does not apply to

Article III.4. In EC-Asbestos, the Appellate Body ruled that the scope of likeness in Article III:4, although

broader than the first sentence of Article III:2, is certainly not broader than the combined products

scope of the two sentences of Article III:2. This different standards were further explained by the

Appellate Body in Japan – Alcoholic Beverages and EC-Asbestos using the accordion analogy (see box below).

Analysis of Likeness under Article III of the GATT 1994: The Accordion Analogy

The accordion of "likeness" stretches and squeezes in different places, as different provisions of

the WTO Agreements are applied. The width of the accordion in any one of those places must be

determined by the particular provision in which the term "like" is encountered as well as by the context and

the circumstances that prevail in any given case to which that provision may apply (Japan - Alcoholic

Beverages, Appellate Body Report, page 23 and EC- Asbestos, Appellate Body Report, paras. 98-99).

Regarding the criteria for determining "likeness" under Article III:4, the Appellate Body confirmed in

EC-Asbestos the following criteria: (i) the product's end uses; (ii) consumers' tastes and habits; (iii) the

product's nature, properties, and quality; and, (iv) the customs classification of the products

(EC-Asbestos, Appellate Body Report, paras. 101-103). As mentioned above, these criteria are simply tools to

assist in the task of sorting and examining the relevant evidence.

Example: ''Like Product'' under Article III:4

In EC - Asbestos, the Appellate Body held that carcinogenicity or toxicity was a physical difference to be

taken into account in the determination of "likeness" between chrysotile asbestos fibres and PCG fibres, and

linked this criterion to the criterion of competitive relationship between the products at issue.

23

It also emphasized the significance of toxicity of a product in relation to consumers' behaviour

(EC - Asbestos, Appellate Body Report, para. 114).

b. The measure is a law, regulation or requirement affecting the internal sale, offering for sale,

purchase, transportation, distribution, or use of the products

Article III:4 relates to all laws, regulations, and requirements affecting the internal sale, offering for sale,

purchase, transportation, distribution or use of products. In Canada-Autos, the Panel, in a finding

subsequently not addressed by the Appellate Body, held that the word "affecting" in Article III:4 of the GATT

1994 has been interpreted to cover not only laws and regulations which directly govern the conditions of sale

or purchase but also any laws or regulations which might adversely modify the conditions of competition

between domestic and imported products (Canada-Autos, Panel Report, paras. 10.80 and 10.84 - 10.85).

The Panel also held in Canada-Autos that a measure can be subject to Article III:4 even if compliance with it is

not mandatory as it also applies to conditions that an enterprise voluntarily accepts in order to receive an

advantage (Canada-Autos, Panel Report, para. 10.73).

c. The imported products " are afforded less favourable treatment"

The national treatment obligation requires that imported and domestic products are given equal treatment in

terms of competitive opportunities. Therefore, if a measure gives imported products "less favourable

treatment" than it gives to like domestic products, the measure will be inconsistent with the national treatment

obligation under Article III:4.

The Appellate Body held in Korea - Various Measures on Beef that a formal difference in treatment between

imported and like domestic products is not necessary, nor sufficient, to demonstrate a violation of Article III:4.

Whether or not imported products are treated "less favourably" than like domestic products should be assessed

instead by examining whether a measure modifies the conditions of competition in the relevant market to the

detriment of imported products (Korea-Various Measures on Beef, Appellate Body Report, paras. 135-137).

In EC – Bananas, Regime for the Importation, Sale and Distribution of Bananas, the Appellate Body held that

Article III:4 does not specifically refer to Article III:1 and therefore, a determination of whether there has been

a violation of Article III:4 does not require a separate consideration of whether a measure "affords protection

to domestic production'' (EC – Bananas, Regime for the Importation, Sale and Distribution of Bananas,

Appellate Body Report, para. 216). However, in EC - Asbestos, it stated that the term "less favourable

treatment" expresses the general principle in Article III:1 that internal regulations ''should not be

applied...so as to afford protection to domestic production" (EC - Asbestos, Appellate Body Report,

para. 100).

24

Example: Finding on' 'Less Favourable Treatment'' under Article III:4

In Korea – Various Measures on Beef, the Appellate Body held that as a consequence of the introduction of

the Korean dual retail system for beef, "the existing small retailers had to choose between, on the one hand,

continuing to sell domestic beef and renouncing the sale of imported beef or, on the other hand, ceasing to

sell domestic beef in order to be allowed to sell the imported product". Apparently, the vast majority of the

small meat retailers chose the first option. The result was the virtual exclusion of imported beef from the

retail distribution channels through which domestic beef (and until then, imported beef) was distributed to

Korean households and other consumers throughout the country (Korea – Various Measures on Beef ,

Appellate Body Report, paras. 145-146).

III.C. EXCEPTIONS

As with the MFN rule, there are exceptions that allow WTO Members to derogate, among others, from the

national treatment principle, as well as specific exceptions that apply only to this principle.

III.C.1. EXCEPTIONS TO THE PROVISIONS CONTAINED IN THE WTO AGREEMENTS – INCLUDING THE NATIONAL TREATMENT PRINCIPLE

These exceptions are the same mentioned for the MFN principle and will be covered in detail later in Modules 8

(Exceptions) and 9 (Development Dimension). They include:

General exceptions (Article XX of the GATT 1994);

Security exceptions (Article XXI of the GATT 1994);

Balance of payment exceptions and temporary application of quantitative restrictions in a

discriminatory manner (Articles XII, XVIII.B, and XIV of the GATT 1994);

Waivers (Article IX:3 of the Agreement Establishing the WTO); and,

A number of provisions on special and differential treatment, which can be found throughout

the WTO Agreements.

III.C.2. EXCEPTIONS TO THE NATIONAL TREATMENT PRINCIPLE

Specific exceptions only related to the national treatment principle can be summarized as follows:

a. Government Procurement (Article III:8A of the GATT 1994)

Advantages or preferences can be accorded to domestic products over imported ones if government agencies

purchase such products for government purposes and not for commercial resale or use in the production of

goods for commercial sale.

25

The Plurilateral Agreement on Government Procurement contains specific rules pertaining to the opening of the

procurement process by government entities to international competition. The rights and obligations it

contains, because of its plurilateral nature, only bind the Members that have ratified it (to know more about

the Plurilateral Agreement on Government Procurement, see Module 11).

b. Subsidies to Domestic Producers (Article III:8B OF THE GATT 1994)

Governments can provide subsidies (including payments to domestic producers derived from the proceeds of

internal taxes or charges applied consistently with the provisions of Article III) exclusively to domestic

producers. GATT Contracting Parties and WTO Members considered that the practice of granting production

subsidies was not necessarily illegal.

In the Tokyo and Uruguay Rounds the GATT CONTRACTING PARTIES introduced progressively additional

disciplines on the use of subsidies. Subsidies and their use are now regulated by the Agreement on Subsidies

and Countervailing Measures and by the Agreement on Agriculture (subsidies limited to agricultural products).

Note also that Members have the right to take certain "corrective measures" – one of them being

countervailing measures - against imported subsidized products which cause injury to a Member's domestic

industry producing "like products". Such duties are collected at the border in addition to, and independently

of, tariffs. Countervailing measures will be addressed in Module 5 (Trade Remedies).

c. Internal Maximum Price Control Measures (Article III:9 of the GATT 1994)

Members recognize that internal maximum price control measures, even though conforming to the other

provisions of this Article, can have effects prejudicial to the interests of the Members supplying imported

products. Accordingly, Members applying such measures shall take account of the interests of exporting

Members with a view to avoiding to the fullest practicable extent such prejudicial effects.

d. Cinematograph Films (Articles III:10 and IV of the GATT 1994)

As an exception to the National Treatment principle, negotiators of the GATT retained the possibility of giving

preferences to products emanating from the national movie industry (exposed cinematograph films). National

preferences are governed by the provisions of Article IV, and take the form of internal quantitative regulations

in "screen quotas".

This provision must now be read together with specific commitments taken by Members in the audiovisual

sector in the GATS Agreement.

26

ILLUSTRATION - NATIONAL TREATMENT FOR GOODS

SCENARIO

Let us assume that Vanin and Tristat are WTO Members. Recently, Vanin promulgated a regulation which

imposes a sales tax of 20 per cent on cars with fuel efficiency below 12.5 miles per gallon (mpg) and a sales

tax of two per cent on cars with fuel efficiency equal or above that amount.

GOOD - CARS SALES TAX

Cars with fuel efficiency

n (mpg)

20%

< 12.5 miles per gallo

Cars with fuel efficiency

= or > 12.5 mpg

2%

Cars with fuel efficiency below 12.5 mpg are also subject to a ban on advertising, which does not apply to

cars with fuel efficiency equal or above 12.5 mpg. Tristat is a main car exporter to Vanin. All cars

manufactured in Tristat are with fuel efficiency below 12.5 mpg. Vanin only produces cars with fuel

efficiency above 12.5 mpg. Tristat believes that Vanin's regulation violates the national treatment principle

under the WTO.

QUESTION

Assume you are an expert on WTO law what would you advise Tristat to argue before a WTO Panel?

PROPOSED ADVICE  

Tristat's argument could be as follows:

National Treatment Principle

Article III of the GATT 1994 embodies the national treatment principle, which prohibits a Member from

favouring its domestic products over the imported products of other WTO Members.

Internal Taxation - Article III:2

With respect to the sales tax, Tristat can invoke Article III:2, which covers internal taxation. Tristat might

argue that even though the sales tax does not make explicit reference to the origin of the products, it is de

facto discriminatory. In this regard, it may argue that the tax has the effect of affording protection to

domestic products by imposing a sales tax of two per cent on domestic cars with fuel efficiency above

12.5 mph, while applying a higher tax of 20 per cent on "like" or "directly competitive or substitutable"

imported cars with fuel efficiency below 12.5 mph. In other words, it is contrary to the principle of national

treatment since in effect or in fact the sales tax favours domestic cars over imported cars.

27

Two–tier test under Article III:2 first sentence

To make a case of violation of Article III:2, first sentence, Tristat will have to demonstrate that:

1) domestic cars with fuel efficiency equal or above 12.5 mph and imported cars with fuel efficiency

below 12.5 mph are "like" products; and 2) imported cars with fuel efficiency below 12.5 mph are taxed

"in excess of" domestic cars with fuel efficiency equal or above 12.5 mph. To show "likeness" Tristat

might argue that they have the same end-uses, share substantially the same physical characteristics,

that consumers normally treat them as perfectly substitutable, and that they are subject to the same

tariff classification.

Three –tier test under Article III:2, second sentence

If Tristat fails to establish that domestic cars with a fuel efficiency equal or above 12.5 mph and imported

cars with a fuel efficiency below 12.5 mph are ''like'' products under Article III:2, first sentence, it can

still invoke the second sentence of that Article and argue that they are ''directly competitive or

substitutable'' products (which has a broader coverage than ''like'' products). Then, Tristat would have

to demonstrate that: 1) imported and domestic cars with different fuel efficiency are directly competitive

or substitutable products; 2) domestic and imported products are not similarly taxed; and 3) such

dissimilar taxation is applied as to afford protection to domestic production. Tristat could argue that

even when the measure does not differentiate between imported and domestic products, due to the

design and structure of the measure it has the effect of affording protection to domestic cars (all cars

originating from Vanin are subject to a sales tax of two per cent, while only imported cars, including

those from Tristat, are subject to a higher sales tax – 20 per cent).

Advertising ban – Article III:4

With respect to the ban on advertising, Tristat can invoke Article III:4, which covers internal regulations.

To make a case of violation of Article III:4, Tristat would have to demonstrate that: 1) the measure is a

law, regulation, or requirement affecting the internal sale, offering for sale, purchase, transportation,

distribution, or use of the imported products (i.e. cars with fuel efficiency below 12.5 mph); 2) imported

and domestic products are "like products"; and 3) imported products are afforded less favourable

treatment. Tristat could argue that because of the advertising ban, cars from Tristat are treated less

favourably than domestic cars since the ban on advertising is only applicable to imported cars.

28

CASE STUDIES

CASE STUDY 2: JAPAN-TAXES ON ALCOHOLIC BEVERAGES II

(Japan – Taxes on Alcoholic Beverages)

(DS8, DS10, DS11)

PARTIES AGREEMENTS TIMELINE OF THE DISPUTE

Establishment of

Panel

27 September

1995

Complainants Canada,

European Union,

United States

Circulation of

Panel Report

11 July 1996

Circulation of AB

Report

4 October 1996 Respondent Japan

GATT 1994

Adoption 1 November 1996

Table 3: Japan – taxes on alcoholic beverages

IN A NUTSHELL

Japanese Liquor Tax Law classified various alcoholic beverages into different categories on the basis of the

alcohol content of the product and established a system of internal taxes applicable to all liquors at different

tax rates depending on the category they fell in. The tax law at issue taxed shochu at a lower rate than

other alcoholic beverages, including vodka and others such as liqueurs, gin, genever, rum, whisky and

brandy.

The Panel found that vodka and shochu were "like" products and that by taxing vodka in excess of shochu,

Japan was in violation of its obligation under Article III:2, first sentence. The Panel also found that shochu

and whisky, brandy, rum, gin, and other liqueurs were directly competitive or substitutable products

according to Article III:2, second sentence, and that Japan, by not taxing them similarly, was acting in a

manner inconsistent with its obligation under Article III:2, second sentence. Japan appealed both findings.

The Appellate Body upheld the Panel's finding that vodka was taxed in excess of shochu, and found the

measure inconsistent with Art. III:2, first sentence. It also upheld the Panel's finding that shochu and

whisky, brandy, rum, gin and other liqueurs were not similarly taxed so as to afford protection to domestic

production, concluding that the measure was in violation of Art. III:2, second sentence.

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CASE STUDY 3: EC-ASBESTOS

(European Communities – Measures Affecting Asbestos and Asbestos-Containing Products)

(DS135)

PARTIES AGREEMENTS TIMELINE OF THE DISPUTE

Establishment of Panel 25 November 1998 Complainants Canada,

Circulation of Panel Report 18 September 2000

Circulation of AB Report 12 March 2001 Respondent European

Union

GATT 1994

Agreement on

Technical Barriers

to Trade (TBT

Agreement)

Adoption 5 April 2001

Table 4: European Communities – Measures Affecting Asbestos and Asbestos-Containing Products

IN A NUTSHELL

The French government adopted Decree No. 96-1133, which imposed a ban on all variety of asbestos fibres.

The Panel found that chrysotile asbestos fibres and polyvinyl alcohol, cellulose and glass fibres ("PCG fibres")

are "like products" under Article III:4. The Panel also found that cement-based products containing

chrysotile asbestos fibres are "like" cement-based products containing PCG fibres. Having found that the

products at issue are like products under Article III:4, the Panel continued to examine the alleged ''less

favourable treatment'' and found that imported asbestos and asbestos-containing products were treated less

favourably than the domestic "like" products. In the light of the findings, the Panel concluded that the

measure was contrary to Article III:4.

On appeal, the European Union argued, among other issues, that the inquiry into the physical properties of

products must include a consideration of the risks posed by the product to human health.

The Appellate Body reversed the Panel's findings that "it is not appropriate" to take into consideration the

health risks associated with chrysotile asbestos fibres in examining the "likeness" under Article III:4 and

reversed the Panel's finding that cement-based products containing chrysotile asbestos fibres and

cement-based products containing PCG fibres are "like products" under Article III:4 of the GATT 1994.

Accordingly, it reversed the Panel's finding that the measure was inconsistent with Article III:4 of the

GATT 1994.

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SUMMARY OF THE KEY DECISIONS OF THE APPELLATE BODY

Japan – Alcoholic Beverages II EC – Asbestos

Article III:2 of the GATT Article III:2 of the GATT Article III:4 of the GATT

1994, First Sentence 1994, Second Sentence 1994

1. Imported and domestic products are ''like product

1. Imported and domestic products are ''like products

1. Imported and domestic products are ''directly

LE

GA

L E

LE

ME

NTS

s''

Should be construed narrowly

Should be determined separately for each tax measure in each case

Should be determined by the particular provision in which the term "like" is encountered.

How was likeness analyzed?

''...vodka and shochu shared most physical characteristics. ... except for filtration, there is virtual identity in the definition of the two product. ... a differ-rence in the physical charac-teristic of alcoholic strength of two products did not preclude a finding of likeness especially since alcoholic beverages are often drunk in diluted form.''

Furthermore, ''vodka and shochu were currently classified in the same heading in the Japanese tariffs'' (Panel report, para. 6.23; Appellate Body report, ps. 19-23).

'' competitive or substitutable

Broader than the first sentence of

products'' Article III:2;

NOT broader than the combined product scope of the two sentences of

Is broader in scope than ''like product''

Should be determined on a case-by-case basis

Article III:2.

A determination about the nature and extent of a competitive relationship between and among products.

The competitive relation-ship between the products at issue in a relevant market is an important factor.

How was this element determined in this case?

How was "likeness" in Article III:4

10. There is a high degree of price-elasticity between shochu, on the one hand, and five brown spirits (Scotch whisky, Japanese whisky, Japanese brandy, cognac, North American whisky) and three white spirits (gin, vodka and rum), on the other.

determined in this case?

12. Highly significant physical difference exists between chrysotile asbestos fibres (which are carcinogenic or toxic in humans, following inhalation) and PCG fibres (which do not share these properties, at least to the same extent).

11. The 1989 Japanese tax reform, which disadvanta-ged domestically produced whisky, led to a rise of both shochu's and foreign produced whisky's market shares in Japan. Shochu and foreign whisky were in fact capturing the market share lost by domestically produced whisky. This proves that there is elasticity of substitution between whisky and shochu.

13. Due to the lack of evidence, the Appellate Body couldn't conclude what proportion of all end-uses for chrysotile asbestos and PCG fibres overlap.

14. Canada presented no evidence on consumers' tastes and habits regarding chrysotile asbestos and PCG fibres.

15. Chrysotile asbestos fibres and the various PCG fibres all have different tariff classifications. (Panel report, paras. 6.28-6.32;

Appellate Body report, p. 25) (Appellate Body report paras. 134-141)

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SUMMARY OF THE KEY DECISIONS OF THE APPELLATE BODY

2. The taxes applied to the imported products are ''in

2. The directly competitive or substitutable imported and domestic products are ''not similarly taxed

2. The imported products are afforded ''less favourra-

excess of

LE

GA

L E

LE

ME

NTS

'' those applied to the like domestic products.

ble treatment'' than domes-tic like products. ''.

Must be more than de minimis

Even the smallest amount of "excess" is too much

Expresses the general principle, in Article III:1, that internal regulations "should not be applied … so as to afford protection to domestic production".

De minimis must be deter-mined on a case-by-case basis

3. The dissimilar taxation of the directly competitive or substitutable imported and domestic products is ''applied so as to afford

protection to domestic production''.

Legislative or regulatory purpose is NOT relevant

Requires a comprehensive and objective analysis of the design, the architecture, and the revealing structure of a measure.

How was this element determined in this case?

''...the combination of customs duties and internal taxation in Japan has the following impact: on the one hand, it makes it difficult for foreign produced shochu to penetrate the Japanese market and, on the other, it does not guarantee equality of competitive conditions between shochu and the rest of "white" and "brown" spirits.

Thus, through a combination of high import duties and differentiated internal taxes, Japan manages to "isolate" domestically produced shochu from foreign competition, be it foreign produced shochu or any other of the mentioned white and brown spirits.'' (Panel report, para. 6.35; Appellate Body report, p. 31)

Table 5: Summary of the key decisions of the appellate body

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EXERCISES

6. What are the main objectives of the national treatment principle?

7. What are the legal elements for finding a violation of Article III:2, first sentence and second sentence?

8. What are the legal elements for finding a violation of Article III:4?

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IV. SUMMARY

NON-DISCRIMINATION –TRADE IN GOODS

As you learned in this Module, there are two non-discrimination principles: MFN and national treatment.

Under the GATT 1994, the "subject" group of the MFN principle and the national treatment principle is

"goods".

For goods, the MFN principle prohibits discrimination between like products originating from, or destined for

other WTO Members, while the national treatment principle prohibits discrimination between imported and

domestic like products. Both principles apply to all goods and cover de jure and de facto discrimination. To

find an inconsistency of the non-discrimination principles under the GATT 1994, different tests apply.

For the MFN principle, Article I:1 sets out a three-tier test. One needs to check the following elements to

find an inconsistency: (1) any advantage, favour of privilege covered by Article I.1; (2) the products at issue

should be ''like'' products; and, (3) the advantage at issue is not immediately and unconditionally granted to

the like product concerned.

The test applicable to the national treatment principle varies according to the paragraph and/or sentence

of Article III concerned: Article III:1 (General Principle), Article III:2 (Internal Taxation) first sentence or

second sentence, and Article III:4 (Internal Laws, Regulations and Requirements Related to Internal Sale,

Transportation, Distribution or Use).

To establish an infringement of Article III:2, first sentence, one must demonstrate that: (1) the imported

and domestic products are like products; and (2) the imported products are taxed in excess of the domestic

products. To establish an infringement of Article III:2, second sentence, one must demonstrate that: (1)

the imported and domestic products are directly competitive or substitutable; (2) the domestic and imported

products are not similarly taxed; and, (3) the dissimilar taxation is applied so as to to afford protection to

domestic production. Finally, to establish an infringement of Article III:4, one must demonstrate that: (1)

the imported and domestic products at issue are "like products"; (2) the measure at issue is a "law,

regulation, or requirement affecting the internal sale, offering for sale, purchase, transportation, distribution,

or use" of the imported products; and, (3) the imported products are afforded less favourable treatment.

The determination of ''like products'' and ''directly competitive or substitutable products'' should be made on

a case-by-case basis. "Like product" is a subset of ''directly competitive or substitutable product'' and thus,

has a narrower scope than the latter. Moreover, the scope of the term ''like product'' itself may vary from

provision to provision. In this respect, the scope of "like products" in Article III:4 covers a broader product

scope than the same term in Article III:2 first sentence, but it is not broader than the combined product

scope of the two sentences of Article III:2 ("like products" in the first sentence plus "directly competitive or

substitutable products" in the second sentence).

The term ''in excess of'' under Article III:2, first sentence, imposes a different standard than that one

imposed by the term ''not similarly taxed' contained in the Ad Note of the second sentence of that Article.

While in the former, even the slightest margin of excessive taxing will constitute an infringement (even if it

is de minimis); the latter requires excessive taxation (more than de minimis).

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To establish an infringement of Article III:2, second sentence, it is necessary to demonstrate that the

dissimilar taxation is applied "so as to afford protection''. It mainly requires a comprehensive and objective

analysis of the design, architecture and structure of the measure. Article III:4 requires a demonstration that

imported products are afforded "less favourable treatment", which expresses the general principle that

internal regulations should not be applied "so as to afford protection''.

There are a number of exceptions to the provisions in the WTO Agreements and specific exceptions that

allow Members to depart from the MFN and national treatment principles, subject to certain requirements,

which will be explained in the corresponding Modules. Some of the most important are those contained in

Article XX of the GATT 1994 (General Exceptions) and, in the case of the MFN principle, Article XXIV of the

GATT 1994 (Regional Integration) and the Enabling Clause.

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PROPOSED ANSWERS

1. If Article I.1 of the GATT referred to any other "MEMBER", this would mean that a Member granting an

advantage to products originating in a country which is not a WTO Member, would not need to extend

such advantage to the products of other WTO Members.

Instead, the MFN principle requires each Member to extend all other WTO Members treatment no less

favourable than the treatment it accords to imports from any country – Member or not of the WTO.

2. The MFN rule works to:

maximize efficiency;

minimize transaction costs (related rules for the issuance of certificates of origin, direct shipment

requirements and other relevant administrative producers can impose significant costs on both

enterprises and governments, but with MFN countries apply the same rules to imports from all

countries);

promote further reciprocal liberalization (this benefits particularly small developing countries, which

benefit from the most favoured treatment provided to other Members);

minimize costs of trade negotiations (negotiating one multilateral agreement instead of several

bilateral agreements).

3. The analysis of consistency of a measure with the MFN principle constitutes a three-tier test. One needs

to check all the three following elements to find a violation: (i) any advantage, favour of privilege covered

in Article I.1; (ii) the products at issue are ''like'' products; and, (iii) the advantage at issue is not

immediately and unconditionally granted to the like products concerned.

4. GATT/WTO case law has set up four criteria that should be considered in determining "likeness": the

product's end uses; consumers' tastes and habits; the product's nature, properties and quality (physical

characteristics), and the customs classification of the products. These criteria do not constitute a closed

list. Instead, they are simply tools to assist in the task of sorting and examining the relevant evidence

according to the case.

5. According to Article I:1 of the GATT 1994, the MFN principle covers a broad range of measures in relation

to exportation and importation, as well as internal measures. Such measures are: customs duties; any

kind of charge imposed on or in connection with importation or exportation; any charge imposed on the

international transfer of payments for imports and exports; the method of levying such duties and

charges; the rules and formalities in connection with importation and exportation, internal taxes or other

internal charges (covered in Article III:2); all laws, regulations and requirements affecting internal sale,

offering for sale, purchase, transportation, distribution or use of any product (covered in Article III.4).

6. The purpose of the national treatment principle embodied in Article III is to:

avoid protectionist measures;

maintain the equality of competitive conditions; and,

protect tariff commitments.

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7. To establish an infringement of the first sentence of Article III:2, one must demonstrate that: (1) the

imported and domestic products are "like" products; and, (2) the imported products are taxed in excess

of the domestic products.

To establish an infringement of the second sentence, one must demonstrate that: (1) the imported and

domestic products are "directly competitive or substitutable"; (2) the domestic and imported products are

not similarly taxed; and, (3) the dissimilar taxation is applied so as to afford protection to domestic

production.

8. To establish an infringement of Article III:4, one must demonstrate that: (1) the imported and domestic

products at issue are "like products"; (2) the measure at issue is a "law, regulation, or requirement

affecting their internal sale, offering for sale, purchase, transportation, distribution, or use"; and, (3) the

imported products are afforded less favourable treatment.

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