DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY

INTERNATIONAL TRADE LAW

PROJECT

Topic: PRINCIPLE OF NATIONAL TREATMENT AND FISCAL

MEASURE

SUBMITTED TO: SUBMITTED BY:

Ms. Priya Anuragini Mohd Ashad
Assistant Professor (Law) Semester VII
Dr. RMLNLU Enroll NO. 190101094
B.A. LLB (Hons.)

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TABLE OF CONTENTS

Contents
PRINCIPLE OF NATIONAL TREAMENT ...............................................................................3

INTRODUCTION ......................................................................................................................3

Meaning of “National Treatment” ........................................................................................................ 3

Objectives of National Treatment Principle .......................................................................................... 3

LEGAL FRAMEWORK GATT ARTICLE III GATT ................................................................4

CASES RELATED TO NATIOANAL TREATMENT PRINCIPLE AND FISCAL MEASURES

IN CONTRAVENTION OF PRINCIPLE ...................................................................................4

EXCEPTIONS TO GATT ARTICLE III (NATIONAL TREATMENT RULE) ..........................6

Government Procurement .................................................................................................................... 6

Domestic Subsidies ............................................................................................................................. 6

GATT Article XVIII:C ........................................................................................................................ 7

ECONOMIC IMPLICATIONS ...................................................................................................7

CONCLUSION ...........................................................................................................................8

BIBLIOGRAPHY .......................................................................................................................9

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PRINCIPLE OF NATIONAL TREAMENT

INTRODUCTION

Meaning of “National Treatment”

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.

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LEGAL FRAMEWORK GATT ARTICLE III GATT

Article III requires that WTO Members provide national treatment to all other Members. Article III:1
stipulates the general principle that Members must not apply internal taxes or other internal charges, laws,
regulations, and requirements affecting imported or domestic products so as to afford protection to domestic
production. In relation to internal taxes or other internal charges, Article III:2 stipulates that WTO Members
shall not apply standards higher than those imposed on domestic products between imported goods and
“like” domestic goods, or between imported goods and “a directly competitive or substitutable product.”
With regard to internal regulations and laws, Article III:4 provides that Members shall accord imported
products treatment no less favourable than that accorded to “like products” of national origin. 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. WTO panels and the Appellate Body reports utilize the same
criteria.

CASES RELATED TO NATIOANAL TREATMENT PRINCIPLE AND

FISCAL MEASURES IN CONTRAVENTION OF PRINCIPLE

Japan Alcoholic Beverages Case1 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 111:2, by
taxing imports at higher rates than ‘like ’ domestic products, and the second sentence of Article
111:2 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

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Japan Alcoholic Beverages Case WT/DS8/15.

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brandy, other fruit brandy, certain classic liqueurs, unsweetened still wine and sparkling wines
should be considered as ‘like’ products in terms of Article 111:2 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 Tike 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.

In Korea - Beef CasejlO], 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.

The imposition of taxes by the importing country is obviously a fiscal measure which falls within
the scope of application of Article III(2). This was confirmed by the working party on Border Tax
Adjustments which found that there was convergence of views to the effect that taxes directly
levied on products were eligible for tax adjustments. Examples of such taxes included specific
excise duties, sales taxes, cascade taxes and taxes on value added products. 2

The regulatory objectives pursued by the tax measure is of no relevance to the question of whether
the measure is an internal tax within the meaning of Article III(2) and the consistency of that
measure within the national treatment requirement. In Japan-Alcoholic Beverages II, the
Appellate Body stated that members may pursue through their tax measures any given policy

2
1970 Report of the Working Party on Border Tax Adjustments, BISD 18S/97, ¶ 14

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objective provided they do so in compliance with Article III(2).3

EXCEPTIONS TO GATT ARTICLE III (NATIONAL TREATMENT RULE)

Although national treatment is a basic principle under the GATT, the GATT provides for certain
exceptions, outlined below.

Government Procurement
GATT Article III:8(a) permits governments to purchase domestic products preferentially, making
government procurement one exception 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 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.
For others, the traditional exception is still in force.

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 are 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 their use.

3
Japan — Taxes on Alcoholic Beverages, WT/DS8/AB/R,.

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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 to 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.
Unlike the trade restrictions for balance of payment reasons in GATT Article XVIII:B, the Article
XVIII:C procedure allows both broader measures and violations of the national treatment
obligations in order to promote domestic infant industries. In the case concerning Malaysia’s
import permit system of petrochemical products, Malaysia resorted to GATT Article XVIII:C as
a reason to enforce import restrictions on polyethylene. Although Singapore filed a WTO case
against this Malaysian practice, Singapore later withdrew its complaint. Thus, neither a panel nor
the Appellant Body had an opportunity to rule on the case.

ECONOMIC IMPLICATIONS
There is a tendency for importing countries to try to use discriminatory application of domestic
taxes and regulations to protect national production, often as the result of protectionist pressures
from domestic producers. This distorts the conditions of competition between domestic and
imported goods and leads to a reduction in economic welfare. The national treatment rule does not
in principle permit these sorts of policies designed to protect domestic products. GATT Article II
does permit the use of tariffs as a means of protecting domestic industry, but this is because tariffs
have high degrees of transparency and predictability since they are published and committed to in
tariff schedules. On the other hand, domestic taxes and regulations are “hidden barriers to trade”
that lack both transparency and predictability. Thus, they can have a large trade-distortive impact.
The existence of GATT Article III generally impedes the adoption of policies and measures aimed
at domestic protection, and thus promotes trade liberalization. In addition, regarding tariff
concessions, GATT Article II recognizes tariffs have been used as tools for domestic industrial
protection. Consequently, it sets a course for the achievement of liberalization through gradual
reductions. Even if tariff reductions were made as a result of trade negotiations, if domestic taxes
and regulations were to be applied in a discriminatory fashion to protect domestic industry

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simultaneously, then effective internal trade barriers would remain. The national treatment rule
prohibits countries from using domestic taxes and regulations Part II Chapter 2 National Treatment
Principle to offset the value of tariff concessions and is, therefore, a significant tool in promoting
trade liberalization.

CONCLUSION
The principal purpose of the national treatment obligations of Article III of the GATT 1994 is to avoid
protectionism in the application of internal tax and regulatory measures. As is explicitly stated in Article
III:1, the purpose of Article III is to ensure that internal measures ‘not be applied to imported and domestic
products so as to afford protection to domestic production’. To this end, Article III obliges Members of the
WTO to provide equality of competitive conditions for imported products in relation to domestic products.

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. Further the use of fiscal measures in
name of internal tax or charges to meet the various objectives of administration of different countries should
be done in consonance with the objectives of the principle of national treatment.

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BIBLIOGRAPHY

Books:

 Lorand Bartels and Federico Ortino, Regional Trade Agreements and the WTO Legal
System, Oxford University Press, March 2012.

Articles:

 Gene M Grossman, Henrik Horn Research, Petros C Mavroidis, ‘Legal and Economic
Principles of World Trade Law: National Treatment’ <http://www.econ-
law.se/Papers/ALI%20-%20National%20Treatment%2028%20April%202012.pdf>.
 ‘Principles of the trading system’
<https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm.
 Michael Trebilcock, ‘The National Treatment Principle in International Trade Law’
<http://law.bepress.com/cgi/viewcontent.cgi?article=1007&context=alea>.
 ‘National Treatment Principle’
<http://www.meti.go.jp/english/report/downloadfiles/gCT0213e.pdf>.
 Lakshmi Neelakantan, ‘National Treatment Principle: Analysis of GATT Article III’
https://cn.lakshmisri.com/News-and-Publications/Publications/Articles/Tax/National-
Treatment-principle-Analysis-of-GATT-Article-III.