NATIONAL

TREATMENT
INTERNATIONAL TRADE LAW

MEANING

National Treatment and MFN are two main

non-discrimination principle in WTO rules.
On the one hand, the MFN principle prohibits
discrimination among the foreign trading
partners whereas the National treatment
principle prohibits discrimination against
foreign products.
However, some concepts used in MFN
principle
such
as
likeness
and
discrimination are relevant in National
treatment also.

CONTD

National Treatment in GATT means that

imported goods will be accorded the same
treatment as goods of local origin with
respect to matters under government
control, such as taxation and regulation.
On the contrast, MFN principle only requires
a government to treat all foreign goods
equally, although domestic products might be
favored.

CONTD
Eg :- If watches are made in A and also
imported into A from X and from Y, MFN
principle requires only that A treat the
watches from X the same as the watches
from Y, but national treatment requires A to
treat the watches from X and Y the same as
it treats its own domestic watches.

CONTD

MFN ensures that tariff and other concessions

were provided to all trading partners equally.
The object of this principle is liberating trade
and maintain harmonious trade relations .
On the other hand, the rule of national
treatment prohibits discriminatory internal
measures.
For eg:-A country might lower its tariff on a
product, but then adopt an internal tax or
regulatory measure that treated the foreign
product worse than the equivalent domestic
one.

PROMINENCE OF NT PRINCIPLE

The national treatment rule addressed this

concern
by
prohibiting
discriminatory
internal measures.
The principle of National treatment is more
prominent than MFN. The reason behind this
is that countries mainly violate MFN principle
due to the free trade agreements and
customs unions, which are permitted under
GATT Article XXIV provided certain conditions
are met.

CONTD.

MFN principles are rarely violated because

countries rarely favour any trading partners
over others.
On the other hand, the National Treatment
issue arises due to perceived attempt to
discriminate against foreign products.
The national treatment rule enables the WTO
member to regulate in non-trade policy areas.
This is because, all domestic taxes or
regulatory measures come within this purview
such as labor rights, environmental issues,
income tax etc.

CASE STUDY

Article III deals with National Treatment on

Internal Taxation and Regulation.

CASES:1. US Taxes on Petroleum and imported

products 1987.
2. Japan Alcoholic Beverage case (1996)

ARTICLE III

Article
III
provides
avoidance
of
protectionism in the application of internal
tax and regulatory measures and the purpose
of Article III.
Therefore the main purpose of Art.III:1 is to
avoid protectionism in the application of
internal tax and regulatory measures.
In other words, once the imported goods
cross the national boundary, it is subject to
national treatment in the host country.

DIFFERENCE BETWEEN INTERNAL

MEASURES AND BORDER MEASURES

Article III only applies to internal measures, not to

border measures. Other GATT provisions, such as
Article II on tariff concessions and Article XI on
quantitative restrictions, apply to border
measures.
Ad note Article III provides that It follows that, if
the import of a product is barred at the border
because that product fails, for example, to meet
a public health or consumer safety requirement
that applies equally to domestic products,
consistency of this import ban with the GATT is to
be examined under Article III, not under Article XI.

ARTICLE III:1

Article III:1 contains general principle and

Article III:2 provides for specific obligations
regarding internal taxes and internal charges.
Article III:1 contains general principle in the
sense that- it provides that internal measure
should not be applied so as to afford
protection to domestic production.
The purpose of Article III:1 is to establish this
general principle as a guide to understand and
interpret the specific obligations contained in
Article III:2 and other paragraphs of Article III.

IN JAPAN ALCOHOLIC BEVERAGES II, THE APPELLATE BODY

STATED WITH RESPECT TO THE PURPOSE OF THE NATIONAL
TREATMENT OBLIGATION OF ARTICLE III:

The broad and fundamental purpose of Article III is to

avoid protectionism in the application of internal tax
and regulatory measures. More specifically, the purpose
of Article III is to ensure that internal measures not
be applied to imported or domestic products so as to
afford protection to domestic producers. Toward this
end, Article III obliges Members of the WTOto provide
equality of competitive conditions for imported
products in relation to domestic products. [T]he
intention of the drafters of the Agreement was clearly
to treat the imported products in the same way as the
like domestic products once they had been cleared
through customs. Otherwise indirect protection could be
given.

CONTD

In Canada Periodicals, the Appellate Body

added:
The fundamental purpose of Article III of
the GATT 1994 is to ensure equality of
competitive conditions between imported
and like domestic products.

ARTICLE III:2
Article III:2 put an obligation that :i. The first sentence set out the rule where the
products are like.
ii. Second sentence when read in combination
with the interpretative note and paragraph I,
it sets out rules for products which are
directly competitive or substitutable.

INTERPRETATIVE NOTE AD ARTICLE

III FROM ANNEX 1( PARAGRAPH 2)

A tax conforming to the requirement of the

first sentence of paragraph 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.

CONTD..

This interpretive note to the second

sentence clarifies that this obligation applies
where the measure at issue is consistent with
the first sentence, and applies only 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.

CONTD
Therefore, in order to determine whether an
internal tax measure is inconsistent with
Article III:2 second sentence, three separate
issues need to be answered:i. The imported products and the domestic
products are directly competitive or
substitutable products which are in
competition with each other;

CONTD.
ii. The directly competitive or substitutable
imported and domestic products are not
similarly taxed; and
iii. The dissimilar taxation of the directly
competitive or substitutable imported
domestic products is applied so as to afford
protection to domestic product.

CONTD

The Geneva session of the preparatory

committee provided an explanation of the
language of the second sentence by noting
that apples and oranges could be directly
competitive or substitutable.
The expression competitive or substitutable
product is wider than like product. E.g :- A
produces Apple at a price 20/- kg whereas B
produces orange at a price 10/- kg. Both fix
some customs duty and give concessions to
each other to enter their products in their
area.

CONTD

Here orange is cheaper than apple. Therefore,

it can become competitive/ substitutive for
apple.
If products are like even a de minims amount
of difference in taxes
will violate the
provision. i.e it is stricter scrutiny where the
products have a higher degree of similarity.
Under the second sentence, the difference in
taxes must be greater, and there must also be
a showing that the objective purpose of the
measure was to afford protection to domestic
products.

ARTICLE III:2 ( FIRST SENTENCE)

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.

CONTD
The two-tier test of consistency of internal
taxation with Article III:2, first sentence,
therefore requires the examination of:
i. whether the imported and domestic products
are like products; and
ii. whether the imported products are taxed in
excess of the domestic products.

US- TAXES ON AUTOMOBILES

In this case, the panel reasoned that the

determination of likeness is based on the
examination of the aims and effects of the
particular tax measure.
In this case, the US imposed a retail excise tax
on cars over US$ 30,000 and the panel had to
determine whether cars with prices above and
below US$30,000 were like product.
The panel in this case held that likeness
should be examined in terms of whether the
less favorable treatment was based in order to
afford protection to domestic production.

WHETHER A PENALTY PROVISION IN

DOMESTIC LAW IS VIOLATION OF ART. III:2?

No. In US Tobacco case, the decision of the

panel was that a penalty provision for the
enforcement of a domestic law is not an
internal tax or charge of any kind within
the meaning of Article III:2, first sentence.

CONTD.

Similarly, the Panel in EEC Animal Feed

Proteins case did not consider a security
deposit to be a fiscal measure although this
deposit accrued to the EEC when the buyers
of vegetable proteins failed to fulfil the
obligation to purchase milk powder. The
Panel considered the security deposit,
including any associated costs, to be only an
enforcement mechanism for the purchase
requirement and, as such, should be
examined with the purchase obligation.

ARTICLE III:4

Unlike Art.III:2, Article III:4 has only

obligation, which requires that no less
favorable treatment be accorded to
imported products as to domestic like
products.

VIOLATION OF ARTICLE III:4

Three elements has to be established:i.
The imported and domestic products at
issue are like products.
ii. Measure at issue is a law, regulation or
requirement affecting their internal sale,
offering for sale, purchase, transportation,
distribution or use; and
iii. Imported products are accorded less
favourable treatment than that accorded
to like products.

CONTD

Art III:4 does not specifically refer to Article

III:1 therefore a determination whether there
has been a violation of Article III:4 does not
require a separate consideration of whether
a measure affords protection to domestic
industry.
Article III:4 applies only to like products
and does not include a provision equivalent
to the second sentence of Article III:2 which
also applies in respect of directly
competitive or substitutable products.

CONTD
In
EC- Meausre affecting asbestos and
asbestos containing products, the appellate
body reported following four criteria to
determine like products:i.
The properties, nature and quality of the
products;
ii. Their end use;
iii. Consumers tastes and habits;
iv. Tariff classification of the products.

AIMS AND EFFECT TEST

Earlier the panel adopted the Aims and Effect
Test to decide like product. This test consist
two question:1. whether the product distinction in question
had the aim of protecting domestic industry?
2. whether that product distinction had the
effect of protecting the domestic industry?

The panel in two cases decided that like

product was to be defined in terms of the
above mentioned two questions.

CASE STUDY
In the early 1990s, GATT panels in the
following two cases developed an approach
under which likeness could be determined
only if the aim and effect of the measure
were to protect domestic goods.
1. United States Measures Affecting
Alcoholic and Malt Beverages.
2. United States Taxes on Automobiles,
GATT, GATT Doc. DS.31/R.(11 oct. 1994)

UNITED STATES TAXES ON

AUTOMOBILES
Issues:- Whether it was consistent with Article
III:2 for imported automobiles selling for
more than $30,000 to be taxed more highly
than domestic automobiles selling for less. In
other words, the panel had to examine
whether the threshold distinction was drawn
so as to afford protection to domestic
production?

CONTD

The panel concluded that both aim and

effect must be demonstrated for the
products to be deemed like .
Applying this reasoning to its consideration of
whether the products at issue- cars costing
$30,000 were like, the panel concluded that
there was no protectionist aim or effect, and
thus the products were not like for the
purposes of Article III:2, first sentence.
Therefore, it is said, different treatment
could be accorded to cars above and below
the price threshold.

A DRIFT FROM AIMS AND

EFFECT TEST

In Japan Taxes on Alcoholic Beverages,

WT/DS8, -10, -11/AB/R (4 October 1996),
the WTO Appellate Body rejected this aim
and effect interpretation of the like
product concept as contrary to the text of
Article III:2, and indicated that GATT dispute
settlement panels should to return to the
more traditional definitions in terms of
likeness.

REASON OF DIVERSION

Panel noted that:- The proposed aim-andeffect test is not consistent with the wording
of Article III:2, first sentence. The panel
recalled that the basis of the aim-and-effect
test is found in the words so as to afford
protection contained in Article III:1. The
panel further recalled that Article III:2, first
sentence, contains no reference to those
words.

FACTS
The internal tax imposed on domestic shochu
was the same as that imposed on imported
shochu; the higher tax imposed on imported
vodka was also imposed on domestic vodka.
Identical products (not considering brand
differences) were thus taxed identically.
However, the question was whether shochu
and vodka should be considered to be like
products. If shochu and vodka were found to
be like, vodka could not be taxed in excess
of shochu.

ISSUE

Whether Vodka and shochu are like product?

CONTD

The Panel noted that vodka and shochu

shared most physical characteristics. In fact,
except for filtration, there is virtual identity
in the definition of the two products. The
panel agreed with the arguments submitted
to it by the EC, Finland and the US that
Japanese Shochu and vodka could be
considered as a like products in terms of
Article III:2 because they were both
white/clean spirits, made of similar raw
materials, and the end-uses were virtually
identical.

CONTD

The panel found that vodka is like shochu

on the basis of its common physical
characteristics and end-uses. On the other
hand, liqueurs, gin and genever were not
like due to use of additives. Similarly,
Rum was not like shochu because of the
use of ingredients; and whisky and brandy
were not like shochu because of
appearance.

APPELLATE BODY
Appellate Body in this case referred to the
following criteria :i.
The products end-uses in a given market;
ii. Consumers tastes and habits;
iii. The products properties, nature and
quality; and
iv. Tariff classification.
The AB also observed that these criteria to
decide like product should be used on a
case-by-case basis.

KOREA- ALCOHOLIC BEVERAGE

CASE
The appellate body in this case stated that
Like products are a subset of directly
competitive or substitutable products: all like
products are, by definition, directly competitive or
substitutable products, whereas not all directly
competitive or substitutable products are like.
The notion of like products must be construed
narrowly but the category of directly competitive
or substitutable products is broader. While
perfectly substitutable products fall within Article
III:2, first sentence, imperfectly substitutable
products can be assessed under Article III:2,
second sentence.