Part I: Basic Principles in the Wto

PART I: BASIC PRINCIPLES IN THE WTO

I.INTRODUCTION

Multilateral rules and principles were agreed back in 1947 to govern trade in goods between GATT Contracting Parties. From 1947 to 1994, the GATT provided the forum for negotiating lower customs duty rates, as well as the reduction or elimination of other trade barriers. The text of the GATT contained important rules, particularly non-discrimination.

After the conclusion of the Uruguay Round and the entry into force of the WTO Agreement, the basic principles formulated in the GATT remained fundamentally unchanged. Since 1995, the updated GATT (called "GATT 1994") has become the general agreement for trade in goods. Other agreements also cover specific sectors such as agriculture, as well as with specific issues such as technical barriers to trade and subsidies.

The WTO Agreement also incorporated new disciplines beyond trade in goods, for example, the GATS and the agreement on trade in services (GATS) and the Agreement on trade related intellectual property rights (TRIPS Agreement).

In this section, you will study the non-discrimination principles and their specific exceptions with reference to the GATT, GATS and TRIPS Agreement.

II.RULES ON TRADE IN GOODS

II.A.NON-DISCRIMINATION PRINCIPLE

Non-discrimination is a fundamental principle of the multilateral trading system and is recognized in the Preamble to of the WTO Agreement as a key instrument to achieve the objectives of the WTO. In the Preamble, WTO members express their desire to eliminate discriminatory treatment in international trade relations. Non discrimination in the WTO is embodied by two principles, the most favoured nation (MFN) treatment obligation and the national treatment obligation.

The MFN principle applies to trade in goods, trade in services, and trade related aspects of intellectual property. According to the Appellate Body in the EU Tariff Preferences case (WT/DS246), the MFN obligation is a cornerstone of the GATT and one of the pillars of the WTO trading system (paragraph 101).

II.A.1.The MFN Principle with regard to the Trade in Goods

IN BRIEF

Pursuant to the WTO agreements countries cannot normally discriminate between their trading partners. If a Member grants to a country a special favour (such as a lower customs duty on one of its products) it must grant the favour immediately and unconditionally to all WTO members.

in detail

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 any other member the best possible treatment it grants to any one else. Hence, each member of the club is guaranteed to receive the best possible treatment from each of its fellow-members.

For example, let us assume that Rauritania's MFN duty (duty applicable to all WTO Members) for tomatoes is 10%. Medatia is a big tomato producer interested in increasing its exports of tomatoes to Rauritania.

If during a WTO negotiating round, the Government of Medatia initiates tariff negotiations on tomatoes with Rauritania. After long and difficult bilateral meetings, Rauritania agrees to give Medatia a duty free access (0%) for tomatoes. However, according to the MFN principle, Rauritania should extend the 0% duty on tomatoes to all WTO Members. This is because all WTO Members should enjoy the most favourable treatment for tomatoes granted by Rauritania.

For trade in goods, the MFN principle requires each Member to extend to all other Members, treatment no less favourable than it accords to imports from any other country.

II.A.2.GATT ArticleI:1

GATT ArticleI:1 contains the specific rules for MFN treatment for goods.

GATTArticleI:1 General Most-Favoured-Nation Treatment
1.With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs2 and 4 of ArticleIII, any advantage, favour, privilege or immunity granted by any Member to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other Members.

The general effect of ArticleI.1 is to create the obligation among WTO Members to give each others' like products the best existing market access opportunities without discrimination in law or in fact.

A detailed reading of the provision reveals that the key elements of the MFN principle are:

1.Any advantage, favour of privilege covered in ArticleI.1.

2.Like products.

3.The immediate and unconditional grant of the advantage at issue to the like products concerned.

ANY ADVANTAGE COVERED IN ARTICLEI:1

The advantages that a WTO Member must grant to all members' like products without discrimination in fact or in law are listed in the first part of ArticleI.1. They are advantages in respect of the following measures:

• Customs duties;
• Any kind of charges imposed on importation or exportation;
• Any kind of charges imposed in connection with importation or exportation;
• Any charges imposed on the international transfer of payments for imports and exports;
• The method of levying such duties and charges;
• The rules and formalities in connection with importation and exportation;
• Internal taxes or other internal charges (covered in ArticleIII.2);
• Laws, regulations and requirements affecting internal sale, offering fore sale, purchase, transportation, distribution or use of any product (covered in ArticleIII.4).

The scope of the measures covered in ArticleI.1 is in practice, wide enough to cover a very broad range of measures in relation to exportation and importation as well as internal measures.

LIKE PRODUCTS

The MFN obligation applies to like products. The idea of "likeness" is very relative and is not defined in the GATT, therefore WTO case law has developed four criteria that should be considered in deciding if products are alike (see for example, Japan – Taxes on Alcoholic Beverages - WT/DS8, 10 and 11; and Canada - Autos WT/DS139 and 142). Such consideration should be assessed on a case by case basis but the said factors are as follows:

1.physical characteristics of the products;

2.end use of the products;

3.consumer preferences;

4.the classification of the products in Members' tariff laws.

THE IMMEDIATE AND UNCONDITIONAL GRANT OF THE ADVANTAGE TO THE LIKE PRODUCTS CONCERNED

Once a WTO Member has granted an advantage to imports from any country, it must immediately grant that advantage to imports from all WTO members and it cannot make the granting of that advantage to imports from all WTO members conditional upon receiving something in return. This obligation applies equally to exports, therefore advantages granted by a WTO Member to exports to any country must be granted immediately and unconditionally to exports to all WTO Members.

PROVISIONS THAT ALLOW DEROGATION FROM MFN

EXCEPTIONS

There are a number of provisions that allow WTO members to derogate from non-discrimination principles as well as from other WTO disciplines. These exceptions will be covered in more detail in Part IV of the module. These provisions include:

• general exceptions;
• security exceptions;
• balance of payment exceptions;
• waivers;
• regional integration exceptions.

SPECIFIC EXCEPTIONS RELATED TO THE MFN OBLIGATION CAN BE SUMMARIZED AS FOLLOWS:

Historical Preferences (GATT Article1.2-4):

Frontier Traffic (GATT ArticleXXIV:3):

ILLUSTRATION

MFN Principle (for Goods)

Let us assume that Vanin, Medatia and Tristat are WTO Members and that Rauritania is not. The MFN principle would prohibit Vanin's customs authorities from levying a customs duty of 10% for imported watches originating in Medatia, while levying a lower customs duty of 5% for imported watches originating in Tristat. The MFN principle requires that the WTO favourable treatment (5%), be granted automatically and unconditionally to imported watches originating from all WTO members (in this case, Medatia). The application of this principle would be the same if the "best treatment" had been initially granted to watches originating in Rauritania, which is not a WTO Member.

One relevant issue is whether watches from Medatia are "like products" vis-à-vis watches from Tristat. If they are not like products, then different treatment (customs duty) may be applied. However, assuming that they are like products, there would be a violation of the MFN obligation by Vanin.

However, if one of the permitted specific exceptions to the MFN or general WTO obligations applies, Vanin's conduct can be considered a permitted derogation and would therefore be consistent with its WTO obligations.

EXERCISES:

1.GATT ArticleI.1 says: "With respect to customs duties … any advantage … granted by any Member to any product originating in or destined for any other COUNTRY shall be accorded immediately and unconditionally."

Why did the drafters of ArticleI.1 of the GATT 1994 refer to "any other COUNTRY" and not "any other MEMBER"?

II.B.THE MFN PRINCIPLE UNDER GATS

Under ArticleII of the GATS, WTO members are held to extend immediately and unconditionally to services and service suppliers of all other members "treatment no less favourable than that accorded to like services and service suppliers of any other country". Therefore, the best access conditions that have been conceded to one country must be extended to all WTO members. This amounts to a prohibition, in principle, of preferential treatment among Members, or groups of Members, in individual sectors, or of reciprocity provisions which confine access benefits to trading partners granting similar treatment.

The MFN obligation is applicable to any measure that affects trade in services in any sector falling under the Agreement, whether specific commitments have been undertaken or not.

SPECIFIC EXEMPTIONS

• Derogations are possible in the form of ArticleII-Exemptions. WTO members were allowed to seek exemptions under the Annex on ArticleI Exemptions before the GATS entered into force. New exemptions can only be granted to new members at the time of accession or, in the case of current members, by way of a waiver under ArticleIX:3 of the WTO Agreement. All exemptions should in principle not last longer than 10 years and are subject to periodic review in the Council for Trade in Services;
• Exemptions in Maritime transport services are still possible (Annex on Negotiations on Maritime Transport Services and doc. S/L/24).

Note that the GATS allows groups of Members to enter into economic integration agreements (ArticleV) and to mutually recognize regulatory standards and certificates (ArticleVII), subject to certain conditions.

II.C.THE MFN PRINCIPLE UNDER TRIPS

The MFN Principle under the Agreement on Trade Related Aspects of Intellectual Property ("TRIPS Agreement") is found in Article4 of the TRIPS Agreement. It requires that "With regard to the protection of intellectual property, any advantage, favour, privilege or immunity granted by a Member to the nationals of any other country shall be accorded immediately and unconditionally to the nationals of all other Members...".

The wording of Article4 of the TRIPS Agreement is similar to that of GATT ArticleI. However, unlike the GATT, in which the subject of MFN treatment is goods, or GATS in which the subjects of MFN treatment is services or service suppliers, in the context of the TRIPS Agreement, the subject of MFN treatment is "nationals". The term national includes persons, natural or legal, who are domiciled or who have a real and effective industrial or commercial establishment in that customs territory. The MFN principle under TRIPS applies to any advantage conferred to the nationals of any other country, even if the benefited country is not a WTO Member.

Article1.3 states that "when 'nationals' are referred to in this Agreement, they shall be deemed, in the case of a separate customs territory Member of the WTO, to mean persons, natural or legal, who are domiciled or who have a real and effective industrial or commercial establishment in that customs territory". The footnote concerns only separate customs territory i.e., a minority of the Membership. For further information see the text of Article1.3 itself.

SPECIFIC EXEMPTIONS

There are some important exemptions specifically related to the MFN Principle in the TRIPS Agreement. These are listed in Article4 (a) - (d) of the TRIPS Agreement.

EXERCISES:

2.Most-favoured-nation treatment must be ensured for which types of services?

III.NATIONAL TREATMENT (ARTICLEIII)

In this section, the National Treatment principle, which constitutes the second component of the non discrimination pillar, will be discussed. The first component is the MFN principle, presented in the previous section.

IN BRIEF

Whilst the MFN principle seeks to ensure that a WTO Member does not discriminate between like products originating in or destined for other WTO Members the National Treatment principle addresses the treatment to be applied to imported products once they are in a Member's territory. The National Treatment principle prohibits a Member from favouring its domestic products over the imported products of other Member countries.
National Treatment principle is foreseen for trade in goods by GATT ArticleIII; for trade in services by GATS ArticleXVII; and for trade-related aspects of intellectual property rights by Article3 of the TRIPS Agreement.

III.A.THE NATIONAL TREATMENT PRINCIPLE IN RULES ON TRADE IN GOODS

According to the National Treatment principle, each trading partner should treat imports no less favourably than they treat like domestically produced goods.

The national treatment obligation for goods is provided in ArticleIII of the GATT 1994. The relevant portions of GATT ArticleIII are paragraphs 1, 2 and 4 as well as the explanatory Ad Note to ArticleIII.

GATT ArticleIII: National Treatment on Internal Taxation and Regulation

1.Members recognize that internal taxes and other internal charges, and 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, should not be applied to imported or domestic products so as to afford protection to domestic production.
2.The products of the territory of any Member imported in to the territory of any other Member shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no Member shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph1.
....
4.The products of the territory of any Member imported into the territory of any other Member shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations, transportation, and requirements affecting their internal sale, offering for sale, purchase, transportation distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.

ArticleIII:1 - The general obligation

ArticleIII:1 lays out the general objective and scope of the national treatment obligation.

The stated objective is to ensure that internal measures are not applied to domestic and imported products so as to afford protection to domestic production.

With regard to the scope of this provision, the national treatment obligation applies to internal measures as opposed to border measures. Thus, before seeking to apply ArticleIII, it is important to ensure that the measure at issue is an internal measure and not a border measure, as the latter would fall under ArticlesII and XI and not ArticleIII. Distinguishing between an internal measure and border measure is assisted by the Ad Note to ArticleIII which provides the following:

Ad Note: to ArticleIII

"Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred to in paragraph 1, which applies to an imported product and to the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation, is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly subject to the provisions of ArticleIII."

ArticleIII:2 - Internal Taxation

ArticleIII:2 applies the general non-discrimination principle set out in paragraph 1 to internal taxation. The first sentence deals with the internal taxation of like products, while the second sentence (by cross reference with the relevant Ad Note) deals with the internal taxation of directly competitive or substitutable products.

ArticleIII:2 - first sentence

To establish an infringement of the first sentence, one must show that 2 elements are present:

(1)The imported and domestic products are like products;

(2)The imported products are taxed in excess of the domestic products.

(1)The imported and domestic products are like products

The determination of likeness for the purposes of the first sentence is to be made on a case by case basis but the following 4 criteria should be used to assist in the determination:

1.The product's end uses;

2.Consumer tastes and habits;

3.The product's properties nature and quality;

4. Tariff classification.

(2)The imported products are taxed in excess of the domestic products

The taxes levied on imported products can not be in excess of those levied on like domestic products. The slightest margin of excessive taxing will constitute an infringement, even if the margin is de minimis.

ArticleIII:2 - second sentence

If either of the elements in the first sentence can not be established, one must still consider if there is an infringement of the second sentence, which casts a wider net.

To establish an infringement of the second sentence, one must show 3 elements:

(1)The imported and domestic products are directly competitive or substitutable;

(2)The domestic and imported products are not similarly taxed;

(3)The dissimilar taxation is applied to give protection to domestic production.