Principles of non-discrimination in the WTO (GATT 1994)

- EC – Bananas III: The essence of the non-discrimination obligations is that like

products should be treated equally.
Most-Favoured-Nation Treatment (Art. I, GATT 1994)
Art. I:1 prohibits discrimination between like products originating in, or destined for, different
countries.
- It helps ensure equality of opportunity to import from, or to export to, all WTO
members
- It covers both, de jure (in law) and de facto (in fact) discrimination
- De jure discrimination: Discrimination through express legal requirements
- De facto discrimination: Measures which, on the face of it, do not appear
discriminatory
- E.g: Origin based measures, and measures which appear origin-neutral,
but are in fact discriminatory
- Canada – Autos: There were no restrictions on the origin of the motor
vehicles eligible for the duty exemption. However, in practice, the
manufacturers imported only their own make of motor vehicles and
those of related companies. As a result, only motor vehicles originating
in a small number of countries benefited from the exemption.
Art. I:1 sets out a three-tier test of consistency, in which three questions must be answered
in order to determine whether there is a violation of the MFN treatment obligation:
Whether the measure at issue confers a trade ‘advantage’ of the kind covered by
Art. I:1
- This concerns any advantage granted by any member with respect to:
- Customs duties, other charges on imports and exports and other customs
matters
- US – Customs User Fee: Merchandise processing fee was held to be a
“charge imposed on or in connection with the importation” within the
meaning of Art. I:1. Thus, exemptions from the fee was required to be
extended unconditionally to all other Members.
- Internal taxes
- Internal regulation affecting the sale, distribution and use of products

- Art. I:1 is said to cast a very wide net on the range of advantages that may fall within
the scope of the obligation.
- E.g: Spain – Unroasted Coffee: Unbound customs duties; Indonesia – Autos:
Duty and sales tax exemptions
- However, the Panel in EC – Commercial Vessels: The scope of application of
Art. I:1 is not unlimited
 - The advantages not only includes that which is granted to other WTO Members, but
also advantages granted to all other countries, including non-WTO Members
- The obligation requires that any advantage granted by a Member to any
product from or for another country be granted to all like products from or for
all other Members
- If a Member grants an advantage to a non-Member, the MFN treatment
obliges the Member to also grant that advantage to all WTO Members
Whether the products concerned are ‘like’ products
- The MFN treatment obligation only applies between ‘like products’, thus products that
are not ‘like’ may be treated differently.
- EC – Asbestos considered a dictionary meaning which suggests ‘like products’ to be
products that share a number of identical or similar characteristics.
- However, Canada – Aircraft, rejected the definition and proposed three questions that
must be resolved in regards to the concept of ‘like products’:
- Which characteristics or qualities are important in assessing ‘likeness’;
- To what degree or extent must the products share qualities or characteristics
in order to be ‘like products’; and
- From whose perspective should ‘likeness’ be judged.

- Spain – Unroasted Coffee: The Panel had to decide whether various types of unroasted
coffee (‘Colombian mild’, ‘other mild’, ‘unwashed Arabica’, ‘Robusta’ and ‘other’)
listed in the Spanish Customs Tariff were ‘like products’ within the meaning of Article
I:1. In examining whether the various types of unroasted coffee were ‘like products’
under the MFN treatment obligation, the Panel considered:
- The characteristics of the products;
- Their end-use; and,
- Tariff regimes of other Members.
- The arguments put forth by Spain to justify the different tariff treatment for some
types of unroasted coffee were mainly related to differences resulting from
geographical factors, cultivation methods, processing of the bean and the genetic
factor.
- The Panel did not consider such differences as sufficient reason to allow for a
different tariff treatment, and held that it is not unusual for agricultural products to
differ in taste and aroma due to the factors argue by the parties. They highlighted that
unroasted coffee, regardless of its type, was universally regarded as a product
intended for drinking.
- This led the Panel to rule that unroasted, non-decaffeinated coffee beans listed in the
Spanish Customs Tariff should be considered as ‘like products’ within the meaning of
Art. I:1.
- By introducing a 7% tariff rate on imports of unroasted, non-decaffeinated coffee of
the ‘unwashed Arabica’ and ‘Robusta’ groups, while affording duty-free treatment to
coffee of other groups, the new Spanish tariff regime was thus, discriminatory against
Brazil.
Whether the advantage at issue is granted ‘immediately and unconditionally’ to all like
products concerned
- Once a WTO member has granted an advantage to imports from a country, it cannot
make the granting of that advantage to imports of other WTO members conditional
upon giving something in return or paying for the advantage.
- Failing to satisfy this final requirement proves the existence of discrimination towards
‘like products’ as against the MFN treatment obligation.
- Canada – Autos: The measure grants import duty exemption to certain motor vehicles
entering Canada from certain countries. The motor vehicles are imported by a limited
number of designated manufacturers who are required to meet certain performance
conditions. In practice, the measure does not grant the same import duty exemption
immediately and unconditionally to like motor vehicles of all other members.
Where all three questions in the three-tier consistency test are answered in the affirmative
(‘yes’), thus, there exists a violation of the MFN treatment obligation under Art. I:1.
Other cases on the MFN treatment obligation:
EEC – Imports of Beef from Canada: The EEC granted a concession on meat in the form of a
global levy free tariff quota of 10,000 tons. The concession required an import license, and a
certificate of authenticity, which had to be endorsed by the issuing authority listed. However,
the only issuing authority listed was the Food Safety and Quality Service (FSQS) of the
United States Department of Agriculture (USDA). This was admitted by the Panel to have
given the effect of disallowing other members besides the USA, to be granted with the levy
suspension. On its face value, it was prima facie unfavourable treatment to Canada by having
its application for levy suspension denied. This is because the act of denying access to ‘like
products’ from origins other than the USA is inconsistent with the MFN treatment obligation.
Canada – Autos: The duty waiver, which covers a full range of imported motor vehicles, allows
Canada to apply a higher import duty to Non-Auto Pact Manufacturers’ import of ‘like
products’ than it does to Auto Pact (treaty between Canada and the USA) Manufacturers’
imports. The duty waiver was thus, inconsistent with the MFN treatment obligation, and that
there was de facto discrimination, as the waiver was only granted to the imports from a
small number of exporting countries affiliated with eligible Canadian manufacturers.
National Treatment (Art. III, GATT 1994)
Art. III prohibits Members from treating imported products that have entered the domestic
market less favourably than like domestic products.
- Japan – Alcoholic Beverages II: The broad and fundamental purpose of Art. III is to
avoid protectionism of internal tax and regulatory measures. It obliges Members of
the WTO to provide equality of competitive conditions for imported products in
relation to domestic products.
- Art. III covers de jure and de facto discrimination
- Japan – Alcoholic Beverages II: The disputed measure was tax legislation that
provided for higher taxes on vodka and domestic shochu.

- Art. III only applies to internal measures, but not border measures.
- Internal measures (Art. III): Where competitive opportunities of the product
on the domestic market are affected
- Border measures (Art. XI): Where the opportunities for the importation of the
product itself (entering the market) are affected

- Whether a measure is an internal or border measure is clarified under Ad Art. III Note
in Annex 1: Any internal tax which applies to an imported product and to the like
domestic product and is collected or enforced at the time or point of importation
should be regarded as an internal tax.
- E.g: If the import of a product is barred at the border due to its failure to meet
a public health or consumer safety requirement that applies equally to
domestic products, the consistency of the import ban must be examined under
Art. III, and not Art. XI.
Art. III:1: Members are prohibited from applying internal taxes (and other internal charges),
and internal regulations to imported or domestic products so as to afford protection to
domestic production.
The general principle laid down in Art. III:1 is elaborated in Art. III:2 (internal taxation) and
Art. III:4 (internal regulation)
Under Art. III:2, there are two non-discrimination obligations in regards to internal taxation;
one is set out in the first sentence, and the other is set out in the second sentence.
‘Internal taxes’ under Art. III:2
- Art. III:2, first sentence concerns ‘internal taxes and other charges of any kind’ which
are applied ‘directly or indirectly’ on products.

- ‘Applied directly or indirectly on products’ should be read as ‘applied on or in

connection with products’
- E.g: Value-added taxes (VAT), sales taxes, excise duties
 - Income taxes or import duties are not included as they are not internal taxes
on products
- US – Tobacco: Penalty provisions for the enforcement of domestic law which
consisted of a non-refundable marketing assessment and a requirement to
purchase additional quantities of certain types of tobacco did not qualify as
internal taxes under Art. III:2.
- US – Malt Beverage: A measure preventing imported products from being sold
in a manner that would enable them to avoid taxation was considered to be
an internal measure within Art. III:2 as it assigned a higher tax rate to the
imported products.

- A tax that is applied ‘indirectly’ has been suggested to be a tax applied on the
processing of the product; covers taxes imposed on inputs.
- Mexico Taxes on Soft Drinks: Non-cane sugar sweeteners were held to
indirectly be subject to internal taxes, as the soft drinks for which they were
used to sweeten were subject to internal taxes in excess of taxes imposed on
like domestic products.

- Art. III:2, second sentence which is concerned with ‘internal taxes or other internal
charges’ is of no difference to the first sentence. Thus, the internal taxes under the
second sentence can be examined in the same way.
National treatment test for internal taxation on ‘like products’ (Art. III:2, first sentence)
- Art. 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 in excess of those applied to like domestic products.
Art. III:2, first sentence sets out a two-tier test of consistency for internal taxation on like
products in which two questions must be answered:
Whether the imported and domestic products are ‘like products’
- The Appellate Body in Japan – Alcoholic Beverages II stated that the concept of ‘like
products’ should be interpreted narrowly because of the existence of the concept of
‘directly competitive or substitutable products’ under Art. III:2, second sentence.
- The Appellate Body agreed with the basic approach set out in the 1970 report of the
Working Party: The concept of ‘like products’ should be examined on a case-by-case
basis, as it would allow a fair assessment of the different elements that constitute a
like product.
- Based on the Appellate Body, and the Working Party’s suggestions in the 1970 report,
some criteria in determining whether a product is ‘like’ are:
- The product’s end-uses in a given market
- Consumers’ tastes and habits, which change from country to country
- The product’s properties, nature and quality
- Tariff classification
 - Japan – Alcoholic Beverages II: Where the products at issue was vodka and domestic
shochu, in this case, the Appellate Body affirmed the finding of the Panel that
domestic shochu and vodka are ‘like products’.
Whether the imported products are taxed in excess of the domestic products
- Art. III:2, first sentence provides that internal taxes on imported products should not
be in excess of the internal taxes applied to like domestic products.
- Japan – Alcoholic Beverages II on taxes ‘in excess of’: Even the smallest amount of
excess is too much.
- The provision seeks to help protect the expectation of an equal competitive
relationship between imported and domestic products.

- Dominican Republic – Import and Sale of Cigarettes: Although the legislation on added
tax on cigarettes was not discriminatory, when the Panel went to observe the actual
practice, it concluded that there was sufficient evidence to indicate that the imported
cigarettes were in fact taxed in excess (de facto discrimination).

- The act of a Member applying higher taxes on imported products in some situations,
but attempts to ‘balance’ this by applying lower taxes in other situations is also
inconsistent with the national treatment obligation.
- Argentina – Hides and Leather: Art. III:2 applies to each individual import
transaction, and does not permit Members to balance more favourable tax
treatment of imported products in some instances against less favourable tax
treatment in other instances.

- Indonesia – Autos: If differences in taxes are based only on the basis of nationality of
producers, or the origins of the parts and components contained in the products,
such tax differences are inconsistent with the national treatment obligation.
Where both questions in the two-tier consistency test are answered in the affirmative (‘yes’),
thus, there exists a violation of the national treatment obligation under Art. III:2, first
sentence.
National treatment test for internal taxation on directly competitive or substitutable
products (Art. III:2, second sentence)
- Art. III:2, second sentence: No Member shall apply internal taxes or other internal
charges to imported or domestic products in a manner contrary to the principles set
forth in Art. III:1.
- Ad Art. III Note in Annex 1: A tax conforming to the requirements of Art. III:2, first
sentence would be inconsistent with Art. III:2, second sentence only in cases where
competition was involved between the taxed product, and a directly competitive or
substitutable product which was not similarly taxed.
- Canada Periodicals on the relationship between Art. III:2 first sentence and second
sentence: In the two-tier test of consistency for the first sentence, there are two
 questions that must be answered in the affirmative in order for there to be a violation
of the first sentence. However, if one of the questions is answered in the negative,
there is a need to examine further whether the measure is consistent with Art. III:2,
second sentence.
Art. III:2, second sentence sets out a three-tier test of consistency for internal taxation on
directly competitive or substitutable products in which three questions must be answered:
Whether the imported and domestic products are directly competitive or substitutable
- Products are directly competitive or substitutable when they are interchangeable, in
that they offer alternative ways of satisfying a particular need or taste.
- Korea – Alcoholic Beverages, ‘directly competitive or substitutable products’: The term
implies that the competitive relationship between products is not to be analysed
exclusively by reference to current consumer preference. The word ‘substitutable’
indicates that the required relationship may exist between products that are not
currently considered by consumers to be substitutes, but which are capable of being
substituted for one another.

- Korea – Alcoholic Beverages on the relationship between ‘like products’ and ‘directly
competitive or substitutable products’: ‘Like products’ are a subset (branch) of
‘directly competitive or substitutable products’. The notion of like products must be
considered narrowly, but the category of directly competitive or substitutable
products is broader. While perfectly substitutable products fall within Art. III:2, first
sentence, imperfectly substitutable products can be assessed under Art. III:2, second
sentence.

- Japan – Alcoholic Beverages II: Domestic shochu was found to be directly competitive
or substitutable with imported liquors, such as whisky, vodka and brandy.
Whether these products are not similarly taxed
- Japan – Alcoholic Beverages II: To be ‘not similarly taxed’, the tax burden on imported
products must be heavier than on ‘directly competitive or substitutable’ domestic
products, and that burden must be more than de minimis (minimal amounts of
domestic support that are allowed even though they distort trade – up to 5% of the
value of production for developed countries, 10% for developing) in any given case.
- Canada – Periodicals: Dissimilar taxation of even some imported products as
compared to directly competitive or substitutable products is inconsistent with
Art. III:2, second sentence.
Whether the dissimilar taxation is applied so as to afford protection to domestic production
- This requirement must be distinguished from the second requirement of ‘not similarly
taxed’
- Japan – Alcoholic Beverages II: If directly competitive or substitutable products are
found to be similarly taxed, there is no further requirement to inquire whether the tax
 was applied ‘so as to afford protection’. If such products are found to be ‘not similarly
taxed’, only then should a further inquiry be necessarily made.
- To determine whether the application of a tax measure affords protection to domestic
products, it is the underlying criteria used in a particular tax measure, the structure
and the overall application, rather than the subjective intent of the legislator that
must be examined (Japan – Alcoholic Beverages II)
- E.g: If the tax measure operates in a such a way that the lower tax brackets
cover almost exclusively domestic production, whereas the higher tax
brackets cover almost exclusively imported products, thus the tax measures
can be said to be applied so as to afford protection to domestic production.
Where all three questions in the three-tier consistency test are answered in the affirmative
(‘yes’), thus, there exists a violation of the national treatment obligation under Art. III:2,
second sentence.

National treatment test for internal regulations (Art. III:4)

- Art. III:4: The products of a Member’s territory imported into another Member’s
territory shall be accorded treatment no less favourable than that accorded to like
products of national origin in respect of all laws, regulations and requirement affecting
their internal sale, offering for sale, purchase, transportation, distribution or use.
Art. III:4 sets out a three-tier test of consistency for internal regulations which requires the
examination of:
Whether the measure at issue is a law, regulation or requirement covered by Art. III:4
- Art. III:4 applies to regulations affecting the sale and use of products.
- Italy – Agricultural Machinery: Art. III:4 not only covers laws and regulations directly
governing the conditions of sale and purchase, but also laws or regulations which
might unfavourably modify the conditions of competition between the domestic
and imported products on the internal market.

- US – Section 337: Where enforcement procedures cannot be separated from

substantive procedures that the serve to enforce, what can be regarded as affecting
the internal sale of imported goods includes substantive laws, regulations and
requirements, and procedural laws, regulations and requirements.

- Art. III:4 has been said to apply to:

- Minimum price requirements applicable to domestic and imported beer
(Canada – Provincial Liquor Boards (US))
- Limitations on points of sale for imported alcoholic beverages (Canada –
Provincial Liquor Boards (EEC))
- The requirement that imported beer and wine be sold only through in-State
wholesalers or other middlemen (US – Malt Beverages)
- A ban on all cigarette advertising (Thailand – Cigarettes)
- Practices concerning internal transportation of beer (US – Malt Beverages)
 - Regulation resulting in higher railway transportation costs for imported grain
(Canada – Wheat Exports and Grain Imports)

- Canada – Wheat Exports and Grain Imports: Sec. 57(c) of the Canada Grain Act which
directly affects access to the Canadian bulk grain handling system described by
Canada as a ‘distribution channel’, was found to be a measure affecting internal
distribution of foreign grain in Canada, thus falling within Art. III:4.
- EC – Bananas III: EC procedures and requirements for the distribution of import
licences for imported bananas among eligible operators within the European
Communities was found to be a measure affecting internal distribution of imported
bananas within the European Communities, thus falling within Art. III:4.

- Canada – Autos: A requirement within the meaning of Art. III:4 need not necessarily
be a government-imposed requirement. However, in determining whether an action
by a private party can constitute a requirement under Art. III:4, it must be established
that there is a nexus (sufficiently close link) between that action and the action of a
government, such that the government must be held responsible for that action.
- E.g: When a government makes the grant of an advantage conditional on
undertakings by private parties.
- In this case, the commitments by Canadian car manufacturers to increase the
value added to cars in their Canadian plants were communicated in letters
addressed to the Canadian Government, thus qualifying as ‘requirements’
under Art. III:4.

- The Agreement on Trade-Related Investment Measures contains an illustrative list on

measures falling within Art. III:4. This includes:
- Measures which are mandatory or enforceable under domestic law or
compliance with which is necessary to obtain an advantage
- Measures that require the purchase or use by an enterprise of products of
domestic origin; or require that an enterprise’s purchases or use of imported
products be limited to an amount related to the volume or value of local
products that it exports.
Whether the imported and domestic products are like products
The Appellate Body in EC – Asbestos analysed at length the interpretation of ‘like products’
under Art. III:4:
- Although both, Art. III:2 and Art. III:4, apply to ‘like products’, Art. III:2 contains two
separate sentences, each imposing distinct obligations, whereas Art. III:4 applies only
to ‘like products’, imposing only a single obligation.
- The term ‘like product’ in Art. III:4 must be interpreted to give proper scope and
meaning to the general principle under Art. III:1, which is to ensure that internal
measures not be applied to imported and domestic products so as to afford protection
to domestic production.
 - As products that are in a competitive relationship in the marketplace could be affected
through treatment of imports which are less favourable that the treatment accorded
to domestic products, thus the word ‘like’ under Art. III:4 must be interpreted to apply
to products that are in such a competitive relationship.
- However, not all products which are in some competitive relationship fall within
Art. III:4. Although the scope of Art. III:4 is broader than the scope of Art. III:2, first
sentence, it is not broader than Art. III:2 as a whole (first and second sentence).
- Thus, the determination of likeness under Art. III:4, is the determination of the nature
and extent of a competitive relationship between and among products.
Whether the imported products are accorded less favourable treatment
- US – Section 337: The ‘no less favourable’ treatment under Art. III:4 expresses the
underlying principle of equality of treatment of imported products as compared to the
treatment given to domestic products. The treatment requires an effective equality of
opportunities for imported products in respect of the application of laws, regulations
and requirements affecting the internal sale, offering for sale, purchase,
transportation, distribution or use of products.

- US – Gasoline: In a dispute concerning legislation designed to prevent and control air

pollution, the Panel found that the measure afforded less favourable treatment to
imported gasoline than to domestic gasoline. Under the baseline establishment
methods (quality of gasoline produced by refiners), imported gasoline was subject to
a stricter statutory baseline, whereas domestic gasoline only had to meet an individual
baseline. Therefore, as imported gasoline was effectively prevented from benefiting
from as favourable sales conditions compared to that afforded to domestic gasoline,
imported gasoline was clearly treated less favourably than domestic gasoline.

- Korea – Various Measures on Beef: In a dispute concerning a dual retail distribution

system for the sale of beef under which imported beef was to be sold in specialised
stores selling only imported beef or in separate sections of supermarkets, the
Appellate Body emphasised that formally different treatment of imported products
did not necessarily constitute less favourable treatment, while the absence of a
formal difference in treatment did not necessarily mean that there was no less
favourable treatment. Whether or not imported products are treated less favourably
than like domestic products must be assessed by examining whether a measure
modifies the conditions of competition in the relevant market to the detriment of
imported products.
Where all three questions in the three-tier consistency test are answered in the affirmative
(‘yes’), thus, there exists a violation of the national treatment obligation under Art. III:4.