Imported products must not be accorded treatment less favorable than that accorded to like domestic products with respect to laws, regulations and requirements affecting their sale, purchase, transportation, distribution or use. For example, it is not permissible to lay down a condition that an imported product must be stored in particular types of warehouses or must be transported by particular types of vehicles, when no such conditions apply to a like domestic product.
A Member cannot have any quantitative regulation requiring compulsory utilization of a product from a domestic source in preference to using a like imported product. For example, it cannot be prescribed that in the manufacture of a chemical, a certain quantity or proportion of a constituent must be obtained from domestic sources.
A Member cannot apply internal taxes or other internal charges or internal quantitative regulations in a manner so as to afford protection to domestic production. Here, “domestic production” does not mean only the production of that particular product; it also means the production of directly competitive or substitutable products. This means that even if the taxes or charges are applied at the same rate on the imported and like domestic products, the manner of application should not afford protection to domestic production. Clearly, a distinction is to be drawn between a ‘like product’ and a ‘directly competitive or substitutable product’. For example, a country may apply a very high internal tax rate on oranges which is applicable to both imported and domestic products, but if this country does not produce oranges, this tax, in effect, goes to raise the price of only imported oranges. And in this manner, this country may be affording protection to its own production of apples, in so far as oranges are directly competitive or substitutable with apples.
Two concepts need elaboration, that is, what constitutes the “like product”, and what are the determinants for concluding that “discrimination’ against an imported product has taken place or that the domestic product has been “protected”.
Like Product: product with similar qualities, not necessarily an identical or equal product. Some of the factors to be considered are: properties, nature, quality and end use. While deciding whether an imported product is a like product in relation to a domestic product, one has to be guided by the basic objective that imported products should not be exposed to more rigorous competitive conditions, and domestic products should not enjoy a more favorable situation of competition.
Sample cases on “like products”
1) The Panel on US-Taxes on Petroleum and Certain Imported Substances (June 1987) examined the differential internal taxation on domestic and imported petroleum and some petroleum products. It found that the domestic products were crude oil, crude oil condensates and natural gasoline, and the imported products were crude oil, crude oil condensates, natural gasoline, refined and residual oil, and certain other liquid hydrocarbon products. It concluded that either the domestic products and imported products were identical or they served substantially identical end uses. The Panel considered them like products.
2) The Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992) considered the exercise tax exemption on wine made from a particular type of grape, i.e., scuppernong grapes. On the complaint of Canada that this practice was inconsistent with Article III, the US argued that the tax provision was uniformly applicable to all wines produced from this particular variety of grape. The Panel examined this question based on the usual criteria of end use, consumer tastes and habits, and the properties, nature and quality of the products, and also on the objective of Article III. The Panel found it relevant to consider whether the differentiation of the products was being made so as to afford protection to domestic production. It observed that tariff classification and tax laws in the US did not claim any public policy purpose for this tax provision except the purpose of subsidizing the small local producers. The Panel concluded that unsweetened still wines were like products and that the differentiation in the tax regulation was affording protection to local products and was therefore inconsistent with Article III.
Discrimination against Imported Products, Protection of Domestic Products:
Discrimination against imported products or protection of domestic products can often be easily detected if done through differential internal taxes or differential internal charges. However, it is not easy if the discrimination or protection is alleged in respect of laws, regulations and requirements affecting sale, purchase, transportation, distribution and use. This matter has been the subject of a large number of disputes in the past. Certain principles have evolved in the course of the consideration of this issue by the various panels. Some of these important principles are given below.
Any requirement on the imported product going beyond the obligation to indicate the origin of the product would be considered inconsistent with Article III 1994 if it dose not also apply to the domestic product. For example, there was a Hawaiian regulation that firms which sold imported eggs had to display a placard stating “we sell foreign eggs”. Australia complained that this requirement affecting sale was inconsistent with Article III.4. The regulation was later withdrawn.
Granting financial facilities, e.g., special credit facilities, tax refunds or tax remission or exemption, for the purchase of domestic products would be considered discriminatory against imported products and as protection of domestic products. For example, the Panel on US Measures Affecting Alcoholic and Malt Beverages (June 1992) examined the US tax measure providing excise tax exemption for domestic producers of beer and wine, which was not available for imported products. The Panel found that the tax law operated to create a lower tax rate on domestic beer and wine than on like imported products and that thus it was discriminatory.
If investors or local industry or importers are obliged to purchase domestic products, there is a denial of opportunity to the like imported products for competing in this particular market. Hence, it would be considered discriminatory against the imported products. For example, the Panel on Canada-Administration of Foreign Investment Review Act (June 1983) examined the Canadian system of written undertakings on purchase and export. Investors were required to give an undertaking to purchase goods of domestic origin. The Panel held that such a requirement clearly meant that imported goods were less favorably treated than domestic goods and that hence, this provision was not consistent with Article III. Further, even if the undertaking was conditional on the goods being competitively available in Canada, the less favorable treatment still held as it resulted in giving preference to domestic products when imported and domestic products were available on equivalent terms.
Imported products cannot be subjected to any special processing requirement which is not obligatory for the domestic product. For example, the UK had a regulation that domestic poultry, after slaughter, could be chilled by any method, whereas imported poultry was to be cooled by only the spin-chill method. The US complained about it and a panel was formed, but the matter got settled in the meantime.
If imported products are required to pass through certain specified wholesale or retail channels or some specified means of transport and if this requirement is not applicable to domestic products, such a requirement will be held to be discriminatory against the imported products. For example, the Panel on US Measures Affecting Alcoholic and Malt Beverages (June 1992) considered a requirement in some states of the US that imported beer and wine be sold only through in-state wholesalers or other middlemen, while some in-state like products were permitted to be sold directly to retailers. The US argued that in-state breweries and wineries bore the same costs as did the wholesalers in respect of record-keeping, auditing, inspection and tax collection. It also said that most in-state beer and wine producers preferred to use wholesalers rather than to market their products directly to retailers. The Panel held that Article III requires relative competition opportunities in the market, irrespective of the actual choices made by enterprises, and that denial of such opportunities creates less favorable treatment to the imported products. This Panel also examined the requirement of some states in the US that alcoholic beverages imported into the state be transported by common carriers authorized to operate as such within the state, whereas in-state producers of alcoholic beverages could deliver their products to customers in their own vehicles. The Panel concluded that such a requirement resulted in less favorable treatment to imported products.
A regulation that domestic products and imported products should both adhere to a minimum-price requirement is not consistent with Article III of GATT 1994, even though the regulation is equally applicable to both domestic and imported products. For example, the Panel on Canada-Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies (February 1992). The Panel was of the opinion that this practice did not necessarily accord equal conditions of competition to imported and domestic products in the sense that the imported product was prevented from being supplied at a price below that of the domestic product.
Products with unbound duty: A Member cannot justify a higher internal tax rate on an imported product on the grounds that it could, in any case, apply a higher tariff on the product not subject to tariff binding.
Balancing not allowed: The obligation of national treatment has to be undertaken as applicable to each individual case of imported products. Thus less favorable treatment accorded to an imported product cannot be justified on the grounds that it has received more favorable treatment in another way, or that another product from the exporting country has received more favorable treatment.
Different regional treatment: When a domestic product is given different treatment in different regions of a country, the treatment which is the most favorable among these is to be accorded to the like imported product.
Measure having negligible effect: Some countries, while defending measures which seemingly violate the obligations of national treatment, have argued that the measures had only a negligible effect on trade and that, therefore, they cannot be causing adverse effects on the imported products. In the course of consideration of this issue in the past, the position which is well established by now is that the actual trade effect is not an important point to be considered; what is crucial to the issue is whether competitive conditions for the imported products in relation to domestic products have been adversely affected. A measure is considered inconsistent with Article III of GATT 1994 if it disturbs the competitive conditions of the imported products getting more favorable treatment compared to the imported products may be negligible in quantity or even if the domestic products might not have effectively received any advantage from the measure. Thus, even in the absence of a trade effect, a case of violation could occur.
For example, the Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992) examined a complaint regarding the reduction of excise duty for some domestic products. In the Panel hearing, the US argued that only 1.5% of domestic beer was eligible for the reduction in the excise tax on beer and less than 1% benefited from the reduction, hence, the tax neither discriminated against imported beer nor provided protection to domestic production. The Panel was of the opinion that Article III protects competitive conditions between imported and domestic products and that this protection is not conditional on trade effects.
The obligation of national treatment does not apply to laws, regulations or requirements governing government procurement where products are purchased for the use of the government and not for commercial resale nor for use in production of goods for commercial resale.
The obligation of national treatment does not prevent payment of subsidies exclusively to domestic producers. In this connection, a US tax measure providing credit against excise taxes to domestic producers of beer and wine came up for consideration in the Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992). The US argued for exemption from the obligation of national treatment on the grounds that the measure in question was in the nature of a subsidy. The Panel noted that the word “payment” of subsidies in Article III refers only to direct subsidies involving payments and not to other measures like tax credits or tax reduction.
A new exception appears in the Uruguay Round Agreement on Subsidies and Countervailing Measures. Subsidies contingent on the use of domestic goods over imported goods are allowed, in the case of developing countries, for five years from the date of the coming into force of the WTO Agreement. For the least developed countries, they are allowed for eight years from that date.
The local content requirement (requirement that permission for investment will be conditional on the use of domestic products to some extent) and the limitation on the use of imported products (related to the value or volume of the domestic products that the firm exports) have been declared to be inconsistent with the obligations of Article III of GATT 1994 in the Agreement on TRIMs. Developed country Members have, however, been given two years from the coming into force of the WTO Agreement to eliminate these measures if they have them. For developing Members, this period is five years and for least developed country Members, it is seven years.
So far, the criteria of determining like products have been based on the characteristics of the products; attempts have been initiated to broaden the scope so as to include in the criteria even the method of production of the products. This is the emerging problem. For example, suppose the imported product is produced in factories which pollute the environment by discharging harmful fluids into the neighboring river. At present, this aspect of the production will be totally irrelevant in comparing this imported product with the domestic product having similar composition, use and other characteristics. The domestic product and the imported product will be considered like products, and, as such, the imported product will have the benefit of national treatment.
Now, attempts are being made to distinguish the imported product from the domestic product on the grounds of whether the production process of the former causes pollution to the environment. If this is accepted as a criterion for determining the like product, the imported product will be declared as not being a like product, and thus will not have the benefit of national treatment.
The multilateral trading system is an attempt by governments to provide investors, employers, employees and consumers with a business environment which encourages trade, investment and job creation as well as choice and low-prices in the market place. Such an environment needs to be stable and predictable, particularly if businesses are to invest and thrive. Predictable and growing access to markets for goods and services is an essential principle of the WTO.
The existence of secure and predictable market access is largely determined by the use of tariffs, or customs duties. While quotas are generally outlawed, tariffs are legal in WTO and are commonly used by governments to protect domestic industries and to raise revenues. However, they are subject to disciplines - for instance, that they are not discriminatory among imports - and are largely “bound”. Binding means that a tariff level for a particular product becomes a commitment by a WTO member and cannot be increased or raised beyond the bound level without compensation negotiations with its main trading partners. Thus, it can be the case that the extension of a customs union can lead to higher tariffs in some areas for which compensation negotiations are necessary. The bound tariff on a product can be higher than the tariff actually applied. The developed countries have normally bound their tariffs at the applied levels. Developing countries, however, have adopted commitments on “ceiling bindings”, that is, bindings at levels higher than the applied rates. This has allowed developing countries to substantially increase their bound commitments, thus underpinning their open markets policies, while keeping a certain margin for protection in case of need.