PRINCIPLE OF NATIONAL TREATMENT

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 17^th and 18^th 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].

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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---

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[1] http://www.investopedia.com/terms/n/nationaltreatment.asp#ixzz2BeP5ia7C

[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. (7^th Supp.) page 60 (1959)

[6] WT/DS135

[7] Japan- Alcoholic Beverages case [ WT/DS 58/AB/R]

[8] WT/DS8/15

[9] DS302

[10] WT/DS161/AB/R