Essay: WTO rules

The World Trade Organization (WTO) is most importantly, or at least traditionally, was the facilitator of negotiations. This is very much what the General Agreement on Tariffs and Trade (GATT) had done, before it helped arrange the set of actual negotiations, put together an agenda, really facilitate. They do not write the rules for the negotiations or the final agreements, that is the role of government. Instead, the WTO helps countries and governments come up with an agreement. A very important aspect of this in the GATT and WTO, is that there is a required consensus for any changes in the basic WTO system. Once there is a change at the Uruguay round for example, it has to be agreed to by everybody. It is a very democratic operation, once in, a member can stop changes from going forth. It is sort of like the Security Council at the United Nations, where every member has a veto.
The question requires a discussion on the role of ‘like products’ under WTO law. Won Mog Choi in “Like Products\’ in International Trade Law: Towards a Consistent GATT/WTO Jurisprudence” states that ‘\”like products\” is one of the most important topics of international trade law. When two products are \”like,\” then various disciplines of the World Trade Organization (WTO) come into play to govern the treatment that a WTO member government owes to another WTO member with regard to goods, services, and intellectual property. Treatment means the way that one member (typically the importing state) applies domestic regulations, taxes, and tariffs.’
The basic underlining issue is that this GATT/WTO principles work in a system that is rule-based and non-discriminatory. That is to say, that the overriding principle or idea of this system, is that a set of rules are laid down, and every member gets the same treatment. Moreover, there are specific principles that are important to understand, such as the Most Favoured Nation (MFN), the National Treatment Principle (NTP), transparency, reciprocal concessions, binding commitments, sovereign government applies the rules, and the exceptions allowed.
With regards to transparency, countries to the very best of their abilities try to make it very clear about what their international trade agreements might be, they write down their tariff schedules which other members can take note of, and there is a trade policy review process every few years where other WTO members evaluate the trade policy of a member government. Therefore, it is very much out on the open whether or not countries are living up to their commitments. Reciprocal concessions really are a negotiating strategy. For example, if A says to B, “I will reduce my (A) tariffs and trade barriers, if you (B) reduce yours”. This is a very effective way for countries to ratchet down their trade restrictions.
As for binding commitments, it is important for countries to write down their tariff, maximum tariff rates also known as ‘bond tariffs’, and to agree not to raise tariffs beyond those levels, except under special circumstances. It is good to keep in mind that sovereign government applies the rules. WTO does not have a system where it will make decisions for other countries, instead the member governments apply the rules subject to dispute settlement procedures. Moving on, due to the fact that the GATT is an international agreement between governments, there are many exceptions to these principles. In every one of these principles, there are a number of ways in which governments can be free of them, but only under certain circumstances, under the rules that are written and agreed to by the member governments.
However, the two principles of the GATT/WTO to highlight for the purposes of answering this essay question, would be the MFN principle and the NTP. The MFN principle is basically treating all members of the WTO in the same way. The NTP too is another critical aspect of non-discrimination.
The MFN principle is one of the main pillars of the multi-lateral trading system. It ensures non-discrimination between trading partners. If a WTO member grants to a country an advantage, it has to give that same advantage 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 partners. In general, the MFN principle ensures that every time a WTO member lowers a trade barrier or opens up a market, it has to do so for the ‘like’ goods or services from all WTO members, without any regard to the member’s economic size or level of development.
It is worth noting that the MFN principle requires a WTO member to accord other WTO members any advantage given to any other country, whether or not that other country is a member of the WTO. To point out, the opposite is not an obligation, that is, that a WTO member can give an advantage to other WTO members, without having to accord that same advantage to other non-WTO members. The MFN principle applies in the field of trade in goods, trade in services, and trade related aspects of intellectual property rights.
Just like most things, the MFN principle too has its exceptions. First up, with regards to free trade agreements. This is where arrangements are made, some members of the WTO get better treatment that other members. For example, NAFTA in the United States (US) has Canada and Mexico having zero tariffs, zero restrictions, coming into the US for a number of products, that may have higher tariffs (and most likely do have higher tariffs), if the exact same product is coming from Europe, Japan or China, and this is allowed in certain exceptional circumstances.
There may also be problems among countries who claim that a foreign supplier is being treated more stringently than a domestic supplier, based on their environmental policies. However, the basic idea is that everybody is going to get treated the same way. It really has more to do with one foreign government or firm being treated less favourably than another foreign government or firm. A practical example will be discussed in order to better explain how the MFN principle contained in Article I of the GATT (at least in trade in goods) is applied.
For instance, X and Y are WTO members, while Z is not. X applies a 30% tariff on import of apples coming from all WTO members. Y is a big exporter of apples, interested in increasing its exports of apples to X. During a WTO negotiating round, X seeks to negotiate the custom duties rate on apples with Y. After long and very difficult bilateral meetings, X agrees to give Y duty free access for apples, that is a 0% tariff. First question, does X have to extend that 0% tariff onto apples to all WTO members? Yes. According to MFN principle, X would have to extend the 0% tariff duty free access on ‘like’ apples on all WTO members. This is because all WTO members should enjoy the most favourable treatment for apples granted by X.
The second question to consider, could X apple a 15% tariff on imports for apples from Z (a non-WTO member), while providing duty free access (that is a 0% tariff) for apples to WTO members? Yes. This is because X can give an advantage to a product from WTO members without having to extend such advantage to a non-member. In other words, only WTO members benefit from the most favourable treatment granted. Final question, could X apply a 15% tariff on imports of apples on WTO members while providing a 0% tariff for apples from Z (a non-member)? No. This is because all WTO members must benefit from the better treatment given to any country, whether or not a WTO member.
On the facts of the above example, it is assumed that of ‘like products’. Noting a relevant issue however, if the apples from Y are not ‘like products’, different treatment may apply. As mentioned earlier, there are exceptions to the MFN principle, and if one of the exceptions applies in the case example above, X may not need to extend the 0% tariff given to apples from Y to all other members.
Basically, the core issue in many of the disputes when countries and the WTO members are disagreeing about something, it is often about whether or not a member government is receiving MFN treatment, and it is really about treating everybody who is a WTO member in the same way. Thus, the disputes are often about whether or not a country may be getting less favourable treatment than another, or may be getting more favourable treatment, in which case it could be considered a violation, whereby both areas are of potential problem and conflict between WTO members.
The MFN principle prohibits country-based discrimination with respect to “like products”. Products that are not “like” may be treated differently. The AB has given guidance on interpreting the term “like products” in Japan – Alcoholic Beverages. Although this case involved Article III of the GATT, the AB set out several propositions that apply to “like product” determinations with respect to Article I:1.
The term “like product” does not mean, in any case, that products must be identical to be “like”. The term “like” includes “similar” products. The AB in Japan – Alcoholic Beverages compared “likeness” to an accordion that “stretches and squeezes in different places as different provisions of the WTO Agreement are applied.” The determination of ‘likeness’ is a case-by-case judgement. The width of the accordion 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. Finally, the determination of “likeness” will always involve an unavoidable element of individual, discretionary judgement.
With these three propositions in mind, an approach towards the issue of “likeness” in GATT Article I:1 can be taken.
A panel will take into consideration the tariff classifications of the products in question in determining whether such products are “like”. In Canada/Japan – Tariff on Imports of Spruce, Pine, Fir (SPF) Dimension Lumber, Canada challenged Japan’s system of classifying “dimension” lumber as discriminatory because different tariffs were applied to different dimension lumber based upon the species of the tree involved. The GATT panel rejected the challenge, ruling that the burden of challenging tariff classifications rests upon the challenger, and Canada had not proved its case. The concept of “dimension” lumber was a Canadian industry standard that had no acceptance internationally as a tariff category and was not, therefore, an appropriate basis for establishing “likeness”. If the particular classification adopted is exceptional or unique, it will be suspect.
Tariff classifications are not, however, conclusive in determining whether products are “like”. A panel will also take into consideration the similarity of the physical characteristics of the products involved, their end use, and whether they are directly competitive or substitutable in the marketplace, based upon objective measurements such as cross elasticity of demand.
In Spain – Tariff Treatment of Unroasted Coffee, the GATT panel found that all unroasted, non-decaffeinated coffee beans should be considered “like products” for purposes of GATT Article I:1 because unroasted coffee is sold mainly in the form of blends and is universally regarded as a single product. On the other hand, in EEC – Measures on Animal Feed Proteins the GATT panel upheld an EEC regulation that differentiated between various animal feed protein products, noting that they carried different tariff classifications and had varying contents and differing vegetable, animal, and synthetic origins. Finally, in some cases there is no dispute that the products involved are “like”.
Moving on, the NTP in Article III of the GATT constitutes the second component of the non-discrimination pillar of the multi-lateral trading system. It is really all about the domestic vs the foreign, ensuring non-discrimination between products or services from both sides. Article III prohibits a member from favouring domestic products over the imported ‘like products’ of other members once those products have entered the domestic market. As discrimination between unlike products is permissible, the determination as to whether products are “like” is central to the administration of Article III.
The objective here is to provide equality of competitive conditions for imported products in relation to domestic products. While the MFN principle ensures that the WTO members do not discriminate between ‘like products’ originating in, or destined for other WTO members, the NTP prohibits discriminatory treatment between imported and domestic products.
Similar to the MFN principle, there are exceptions as well to the NTP. This will be broken down in terms of how the NTP in Article III of the GATT, at least for trade and goods, applies to the following two practical examples. Firstly, T (WTO member) adopts a regulation which imposes a sales tax of 25% on imported soft drinks and a sales tax of 5% on domestic soft drinks. Secondly, T applies a special package requirement for the internal transportation of imported soft drinks contained in glass bottles, that its country does not apply to domestically produced soft drinks contained in glass bottles.
Two questions to raise here are as the following. Can T apply a 25% sales tax on imported soft drinks and a sales tax of 5% on domestic soft drinks? Can T impose a special package requirement only on imported soft drinks contained in glass bottles? For both of these questions, the answer is no. Based on the assumption that the domestic and imported products are ‘like products’, T cannot apply its internal measures in a way that it favours its domestic products over its imported products from other WTO members. The NTP as set forth in Article III of the GATT applies only to internal measures as opposed to border measures, such as tariffs. It covers both internal taxes and regulations. The sales tax of 25% in the given example above, constitutes an internal tax, while the special packaging requirement for the internal transportation of imported soft drinks contained in glass bottles, would constitute an internal regulation.
NTP is a very common issue in disputes in front of the WTO, where a foreign firm or government may complain that domestic firms are getting treated more favourably, and that would be a violation of national treatment, where it was previously agreed upon that the same treatment would apply for both domestic and foreign products. Therefore, if one has a ‘de facto’ regulation that is more disadvantageous to foreigners rather than domestic firms, it could most likely cause problems under WTO law.
Three different approaches have been used for determining whether imported and domestic products are “like” for purposes of the NTP obligations set forth in Article III:2 and III:4.
Under the first approach, which the AB has applied to Article III:2, first sentence, involving internal taxes and charges, a case-specific assessment and comparison is made of the two or more products as to their physical properties, nature and quality, end uses, consumers’ tastes and habits, and any other relevant point of comparison. The AB has emphasized that, under this test, the term “like” product is construed narrowly. Since the test is in fact specific, panels are free to use their “best judgement” in making the determination. This test, what might be called the “physical characteristics” test, is the traditional GATT-based test, consistently followed “in almost all adopted panel reports”.
The second approach to the like products test applies to the second sentence of GATT Article III:2. Article III:2, second sentence, is the subject of an interpretive note which provides that the term “like product” refers to a “directly competitive or substitutable product” for purposes of applying this sentence. The AB has construed this note as mandating a “directly competitive or substitutable products” test for the second sentence of Article III:2. This comprehends a broader range of products than the narrower “like” product test of Article III:2, first sentence. The panel will determine how much broader this may be in any given case based on all the relevant facts. As with the first sentence “like” product determination, the “directly competitive or substitutable product” test is a case-by-case judgement. Panels should consider not only matters such as physical characteristics, common end uses and tariff classifications, but also marketplace factors, competition in the relevant markets, elasticity of substitution and cross-price elasticity of demand.
A third approach to the “like” product issue was used by the AB in interpreting Article III:4 in European Communities – Asbestos. This case best illustrates how the “like product” concept is handled under this provision. The issue was whether chrysotile asbestos fibres are like fibres made from other materials, such as polyvinyl alcohol, cellulose, and glass.
In answering this question, the AB began its analysis by stating that Article III sets out an overarching “general principle”, avoiding protectionism and ensuring equality of competitive conditions between imported and domestic products, that “informs” the rest of Article III. From this principle, it follows the word ‘like’ in Article III:4 is to be interpreted to apply to products that are in such a competitive relationship. Thus, a determination of likeness under Article III:4 fundamentally is a determination about the nature and extent of a competitive relationship between and among products. The AB thus concluded that the scope of ‘like’ in Article III:4 is broader than the scope of ‘like’ in Article III:2, first sentence, but is not broader than the combined Article III:2.
The AB then set forth a new test for “like products” that is a synthesis of the physical character and marketplace ideas. The AB emphasized that “all pertinent evidence” should be marshalled under four general criteria; the properties, nature and quality of the products, their end-uses, consumers’ tastes and habits, and tariff classifications of the products. From this evidence, panels should determine likeness exercising “an unavoidable element of discretionary judgement”.
Applying these criteria and considering the evidence in the Asbestos case, the AB concluded that particularly in view of the public health risks of asbestos, the party alleging the Article III violation had failed to carry its burden that chrysotile fibres are like fibres made from other materials for purposes of Article III:4.
Like product determinations under Article III are to be made on a case-by-case basis that will always involve an unavoidable element of individual, discretionary judgement.
In certain cases under the GATT, panels examines the aim and market effects of the measure at issue to determine whether the imported and domestic products were ‘like’. This approach was used in the Malt Beverages case, in which Canada challenged certain U.S. state and federal taxes and sales regulations that discriminated against imported alcoholic beverages. The panel concluded that “like” product determinations should be made not only in light of criteria such as the products’ physical characteristics, but also in light of the purpose of Article III, which is to ensure that internal taxes and regulations not be applied to domestic products so as to afford protection to domestic production. This approach came to be known as the “aims and effects” test.
The Malt Beverages case illustrates the aim and effects approach. One measure challenged in that case was a Mississippi wine tax imposing a lower tax rate on wines made from a certain grape variety. The panel concluded that there was no public policy purpose for the wine tax other than protecting local producers and that the imported and domestic wines were therefore “like” products. The wine tax was found to be inconsistent with Article III.
Other measures that were challenged were several state restrictions on the sale of beer that discriminated between types of beer on the basis of alcohol content. The panel concluded that low alcohol content beer and high alcohol content beer need not be considered as like products, because the purpose of the restrictions was to encourage consumption of low alcohol content beer and the restrictions did not create adverse conditions of competition for Canadian producers. These restrictions were found to be consistent with Article III.
The aim and effects test was determinative in United States – Taxes on Automobiles, in which the panel concluded that a “like” product determination included an examination of whether the measure at issue had a protective aim or effect. The panel upheld U.S. luxury and gas guzzler taxes on cars, despite their disproportionate application to imported vehicles, because of the absence of any protective aim or effect. The issue of protective effect was analysed, not in terms of actual sales data, but on the basis of potential effect. The panel noted that there was no evidence that foreign manufacturers lacked inherent capacity to market automobiles below the high tax thresholds. The panel also found that U.S. Corporate Average Fuel Efficiency Rules were in violation of Article III:4 because certain averaging formulas discriminated against foreign vehicles. This case was highly controversial, and the Contracting Parties never adopted the panel report because the EC opposed the aim and effects test.
The AB expressly rejected the aim and effects test in Japan – Alcoholic Beverages. In that case, the AB parsed Article III and concluded that “like” product determination under Article III:2 does not include an examination of whether the measure at issue has a protective aim or effect. The AB reasoned that there is no textual basis for the “aim and effects” test.