The National Treatment Principle along with the
Most-Favored-Nations (MFN) Principle constitutes the two pillars of the
non-discrimination principle that is widely seen as the foundation of the
GATT/WTO multilateral trading regime. National Treatment is an integral part of
many World Trade Organization agreements. It is found in all three of the main
WTO agreements viz. GATT, GATS and TRIPS. It is a concept of
international law that declares if a state provides certain rights
and privileges to its own citizens; it also should provide equivalent
rights and privileges to foreigners who are currently in the country. This
concept of equality can be found in bilateral tax treaties
and also in most World Trade Organization agreements.[1]
Under National Treatment, if a state grants a particular right, benefit or
privilege to its citizens, it must also grant those advantages to the citizens
of other states.
The National Treatment principle has an ancient genesis in international trade law, arguably dating back to ancient Hebrew Law[2] and then appearing in agreements between Italian city states in the 11th Century[3], in commercial treaties concluded during the 12th Century between England and continental powers and cities, and in agreements among German city states constituting the Hanseatic league from the 12th Century onwards. The principle was also adopted in various shipping treaties entered into between European powers in the 17th and 18th centuries, and became commonplace in the trade treaties drawn up in large numbers in the latter part of the 19th century, as well as appearing in the Paris and Berne Conventions governing intellectual property rights entered into late in the 19th century[4].
.
MEANING
OF NATIONAL TREATMENT
PRINCIPLE:
National
treatment means Imported and locally-produced goods should be treated equally.
This principle of “national treatment” (giving others the same treatment as
one’s own nationals) is found in Article 3 of GATT.
The principle of National Treatment as embodied in
Article III of General Agreement on Tariffs and Trade (GATT) prohibits
discrimination between domestic and foreign goods in the application of
internal taxation and government regulations after the foreign goods satisfy
customs measures at the border.
A good summary is found in Japan- Alcohol case, which
states; “[a] national treatment obligation is a general prohibition on the
use of internal taxes and other internal regulatory measures so as to afford
protection to domestic production.”
National
treatment only applies once a product, service or item of intellectual property
has entered into the market. Therefore, charging customs duty on an import is
not a violation of national treatment even if locally-produced products are not
charged an equivalent tax. Under the
National Treatment Rule, Members must not accord discriminatory appropriate
treatment between imports and like domestic products.
OBJECTIVES OF NATIONAL TREATMENT PRINCIPLE:
The objective of national treatment is “to protect
expectations of the contracting parties as to the competitive relationship
between their products and those of other contracting parties. In other words the
purpose of the national treatment rule is to eliminate “hidden” domestic
barriers to trade by WTO Members through according imported products treatment
no less favorable than that accorded to products of national origin. The
adherence to this principle is important to maintain the balance of rights and
obligations, and is essential for the maintenance of the multilateral trading
system.
NATIONAL TREATMENT PRINCIPLE UNDER GATT 1994:
Article III is
constructed to be comprehensive in scope. Article III: 1 contains ‘general
principles’ and informs and provides the context for the rest of the Article
III. In addition, Article III: 1 defines the scope of the application of
Article III to include:
1)
Internal taxes and charges
2)
laws, regulations and requirements affecting the sale,
transportation, distribution or use of products; and
3)
Internal quantitative regulations requiring the mixture,
processing or use of products in specified proportions.
The purposes of
Article III are to assure that national domestic measures do not subvert the
Article II tariff binding and limit national protective measures to border
controls.[5]
Article III secures ‘effective equality of opportunity for imported products’
to compete with domestic products.
Article III: 1 prohibits the
application of internal taxes and other internal charges as
well as the 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, to imported or domestic
products so as to afford protection to domestic production.
Article III: 2, first sentence, prohibits the direct
or indirect application of internal taxes or other internal charges of any kind
to imported products in excess of those applied, directly or indirectly, to
like domestic products.
It prohibits
discrimination between imported and domestic ‘like’ products.
For the application of
Article III: 2, first sentence two conditions must be satisfied:
Ø Whether the taxed
imported and domestic products are ‘like’.
Ø Whether the taxes
applied to the imported products are ‘in excess of’ those applied to the
like domestic products.
ü Like Product: The
term ‘like product’ does not mean that products must be identical to be ‘like’.
The term ‘like’ includes ‘similar products’. In determining the similarity of
“like products,” GATT panel reports have relied on a number of criteria
including tariff classifications, the product’s end uses in a given market,
consumer tastes and habits, and the product’s properties, nature and quality.
The same idea can be found in reports by WTO panels and the Appellate Body.
In EC – Asbestos
case[6]
the
Appellate Body considered in its examination of the concept of ‘like products’
under Article III: 4 as ‘like products’ are products that share a number
of identical or similar characteristics.
In Japan Alcohol
case by applying the above-mentioned criteria for examination of the
products at issue, the Panel concluded that vodka and shochu were like products
because both vodka and shochu shared most physical characteristics and except
for the media used for filtration there was virtual identity in the definition
of two products.
ü In Excess of: According to
Appellate Body, “even the smallest amount of ‘excess’ is too much.
Article III: 2, second sentence,
prohibits the application of internal taxes or other internal charges to
imported or domestic products in a manner contrary to the principles set forth
in paragraph 1 (Article III: 1).
The explanatory note
added to Article III: 2 states that a tax conforming to the requirements of first
sentence paragraph 2 would be considered to be inconsistent with the provision
of the second sentence only in cases where competition was involved between, on
the one hand, the taxed products and, on the other hand, directly competitive
or substitutable products that were not similarly taxed.
For the application of
Article III: 2, second sentence three conditions must be satisfied:
Ø Whether the imported
and domestic products are ‘directly competitive or substitutable products’.
Ø The products are ‘not
similarly taxed’.
Ø The dissimilar
taxation of the products is ‘applied ….so as to afford protection to domestic
industry’.
ü Directly Competitive
or Substitutable Products: According to the Appellate Body, if the imported and
domestic products are not ‘like’ products for the purposes of Article III: 2,
first sentence, then they are not subject to the strictures of Article III: 2.
However, depending on their nature, and depending on the competitive conditions
in the relevant market, those products may well be among the broader category
of "directly competitive or substitutable products" that fall within
the domain of Article III:2, second sentence.
The determination of the appropriate range of
"directly competitive or substitutable products" under Article III: 2
second sentence must be made on a case-by-case basis, taking into account all
the relevant facts.
The Appellate Body also agreed with the Panel's view that
the decisive criterion in order to determine whether two products are directly
competitive or substitutable is whether they have common end-uses, inter alia, as shown by
elasticity of substitution in the relevant markets.[7]
ü
Not Similarly Taxed: The phrase ‘not similarly taxed’ does not
mean the same thing as the phrase "in excess of" in Article III: 2,
first sentence. It agreed with the Panel that the amount of differential
taxation must be more than de minimis to be deemed "not similarly taxed"; and whether
any particular differential amount of taxation is de minimis or not must be
determined on a case-by-case basis. Thus, to be "not similarly
taxed", the tax burden on imported products must be heavier than on ‘directly
competitive or substitutable’ domestic products.
ü
So as to Afford Protection: In this respect, the
Appellate Body found the approach followed in the 1987 Japan –
Alcohol case in the examination of the issue of "so as to afford
protection" persuasive and concluded 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 as related to domestic as compared to imported products.
Article III: 4, The
products of the territory of any contracting party imported into the territory
of any other contracting party shall be accorded treatment no less favorable
than that accorded to like products of national origin in respect of all laws,
regulations and requirements affecting their internal sale, offering for sale,
purchase, transportation, distribution or use.
In
Korea — Various Measures on Beef, the Appellate Body explained the three
elements of a violation of Article III: 4:
Ø The
imported and domestic products at issue are ‘like products.
Ø The
measure at issue is a ‘law, regulation, or requirement affecting their internal
sale, offering for sale, purchase, transportation, distribution, or use.
Ø The
imported products are accorded ‘less favorable’ treatment than that accorded to
like domestic products.
CASES RELATED TO
NATIONAL TREATMENT PRINCIPLE:
Japan
Alcoholic Beverages Case[8] was the first
significant case brought before the GATT. The issue in this case was an
internal tax measure that classified alcoholic beverages into different
categories, sub-categories and grades, based on alcohol content and other
qualities, and set different tax rates on each category of alcoholic beverages.
The European Communities complained that the Japanese liquor tax system
violated the first sentence of Article III:2, by taxing imports at higher
rates than ‘like’ domestic products, and the second sentence of Article
III:2 by affording protection to ‘directly competitive or substitutable’
domestic products. Japan responded by arguing that each contracting party
to the GATT was free to classify products for tax purposes as it chose and that
the ‘likeness’ or ‘directly competitive or substitutable’ relationship of
imported and domestic products were legally irrelevant to the interpretation of
Article III if both of these products were taxed in a non-discriminatory
manner, regardless of their origin.
The panel concluded,
in view of their similar properties, end-uses and usually uniform classification in
tariff nomenclatures, that imported and Japanese-made gin, vodka, whisky, grape brandy, other
fruit brandy, certain classic liqueurs, unsweetened still wine and sparkling wines should be
considered as ‘like’ products in terms of Article III:2 first sentence because
such ‘likeness’ of these alcoholic beverages were recognized not only by
governments for the purposes of tariff and statistical nomenclature, but also
by consumers to constitute "each in its end-use a well defined and single product intended for
drinking" and that minor differences in taste, color and other properties did not prevent
products from qualifying as ‘like products’.
The
Appellate Body concluded that Japanese ‘shochu’ and ‘vodka’ are like and that
vodka was subject to taxes ‘in excess of’ those on shochu. ‘Even the
smallest amount of excess was too much’ and this was a violation.
Dominican
Republic Cigarettes Case[9], In this
case Honduras requested consultations with the Dominican Republic
concerning certain measures affecting the importation and internal sale of Cigarettes.
According to
Honduras:
Ø Dominican
Republic accords condition of competition to imported Cigarettes that are
less favorable than those accorded to domestic cigarette by requiring that
stamp be affixed to Cigarettes packages in the territory of Dominican Republic.
Ø Dominican
Republic entails costs and administrative burdens hindering the importation
of cigarettes by requiring importers of cigarettes to post a bond.
Ø Dominican
Republic does not publish the surveys conducted by the Central Bank that
are to be used to determine the value of cigarettes for the purpose of applying
the Selective Consumption Tax.
Summary of Panel/AB’s Findings:
ü The Panel
found that the stamp requirement, which required tax stamps to be affixed to
cigarettes packets in the Dominican Republic accords less favorable
treatment to imported cigarettes than the like domestic product is contrary to
Article III: 4 of the GATT.
ü
Honduras did not demonstrate that the bond
requirement imposed on cigarettes importers by the Dominican Republic
violates either Article X: 1 or III: 4.
ü
Before the legislation was amended in January 2004, the Dominican
Republic imposed its Selective Consumption Tax on imported cigarettes in a
manner inconsistent with Article III: 2 and X of the GATT.
In Korea
– Beef Case[10],
the Appellate Body considered whether Korea was infringing the national
treatment obligation by maintaining a ‘dual retain system’ for marketing beef
that confined sales of imported beef to specialized stores. In this case Korean
Law created two distinct retail distribution systems for beef: one for domestic
beef another for imported beef. A large retailer could sell both domestic and
imported beef were required to display a sign reading “Specialized Imported Beef
Store”.
The
Appellate Body noted that the effect had been the reduction of retail outlets
for imported beef. This ‘reduction of competitive opportunity’ was not
consistent with the requirements of Article III: 4 of the GATT.
EXCEPTIONS TO GATT ARTICLE III (NATIONAL TREATMENT RULE):
Although national treatment is a basic principle under
the GATT, the GATT provides for certain exceptions as follows:
a) Government Procurement
GATT Article III: 8(a) permits governments to purchase
domestic products preferentially, making government procurement one of the
exceptions to the national treatment rule. This exception is permitted because
WTO Members recognize the role of government procurement in national policy.
For example, there may be a security need to develop and purchase products
domestically, or government procurement may, as is often the case, be used as a
policy tool to promote smaller business, local industry or advanced
technologies. While the GATT made government procurement an exception to the
national treatment rule, the Agreement on Government Procurement resulting from
the Uruguay Round mandates signatories to offer national treatment in their
government procurement. However, WTO Members are under no obligation to join
the Agreement on Government Procurement. In fact, it has mostly been developed
countries that have joined the Agreement. Therefore, in the context of
government procurement, the national treatment rule applies only between those
who have acceded to the Agreement on Government Procurement, and for others,
the traditional exception is still in force.
(b) Domestic Subsidies
GATT Article III:8 (b) allows for the payment of
subsidies exclusively to domestic producers as an exception to the national
treatment rule, under the condition that it is not in violation of other
provisions in Article III and the Agreement on Subsidies and Countervailing Measures.
The reason for this exception is that subsidies are recognized to be an
effective policy tool, and is recognized to be basically within the latitude of
domestic policy authorities. However, because subsidies may have a negative
effect on trade, the Agreement on Subsidies and Countervailing Measures imposes
strict disciplines on the use of subsidies.
(c) GATT Article XVIII: C
Members in the early stages of development can raise
their standard of living by promoting the establishment of infant industries,
but this may require government support and the goal may not be realistically
attainable with measures that conform to the GATT. In such cases, countries can
use the provisions of GATT Article XVIII: C to notify WTO Members and initiate
consultations. After consultations are completed and under certain
restrictions, these countries are then allowed to take measures that are
inconsistent with GATT provisions excluding Articles I, II and XIII.
(d) Other Exceptions to National Treatment:
General Exceptions would also apply on the principle of
national treatment. The provisions of GATT Article XX on general exceptions,
Article XXI on security exceptions and WTO Article IX on waivers also apply to
the national treatment rule.
CONCLUSION:
Naturally,
we look to the purpose of the anti-discrimination provision to help us apply
it, but moving from general purpose to a specific test is also problematic. By
all accounts, the national treatment principle is designed to interdict
"hidden protectionism" and to prohibit measures that are equivalent
to tariff barriers, with the goal of protecting the commitments that WTO
members have made to reduce tariff and other trade barriers and to insure
equality of competitive conditions. This
is to prevent countries from taking discriminatory measures on imports on the
one hand, and to prevent countries from offsetting the effects of tariffs
through non-tariff measures.
In operation national treatment
serves to limit the exercise of sovereignty. It provides the basis on which
trade liberalization proceeds or international markets are ‘opened up’. It
allowed a margin for social and cultural differences between member countries.
The foregoing analysis has shown that while national treatment remains a key
principle in ensuring that municipal laws do not discriminate against the
nationals of other Member States. In this regard, the role of the national
treatment principle reflects the erosion and re-conceptualization of the
traditional notion of national sovereignty.
So
basically we can say that national treatment principle prevent the
discrimination in the international market among the members country. There are
some exceptions to the principle of national treatment as like government
procurement, production subsidies and general exceptions. To understand the national
treatment principle we need to understand the concept of like products
mentioned under the provisions of GATT 1994.
---Manisha Sahu---
---Manisha Sahu---
[2]
See William Smith Culbertson, International Economic Policies:
A Survey of the Economics of Diplomacy (D.
Appleton Company,
1925), at page 24
[3]
See Michael M. Hart, “The Mercantilist’s
Lament: National Treatment and Modern Trade Negotiations” in Journal of World Trade Law, Vol. 21, No. 6, Dec. 1987, at page 38.
[4]
See Article 2 of the Paris Convention for
the Protection of Industrial Property of March 20, 1883; and Article 5 of Berne
Convention for the Protection of Literary and Artistic Works of September 9,
1886.
[5] Italian Discrimination Against
Imported Agricultural Machinery,
23 October 1958, GATT B.I.S.D. (7th Supp.) page 60 (1959)
[6] WT/DS135
[7] Japan- Alcoholic Beverages case [
WT/DS 58/AB/R]
[9] DS302
[10] WT/DS161/AB/R
