International Economic Law National Treatment - Article III GATT

Internal regulations and GATT Domestic instruments: fiscal/non fiscal measures – regulatory intervention they may affect trade They come under the purview of GATT Article III – National treatment No protection to domestic production through internal measures - avoidance of concession erosion – EQUALITY OF OPPORTUNITIES No modification of Competitive relationship (AB Asbestos: par. 98 /Panel JAB: 109) Advantage to national producers The only form of legal protection in GATT are tariffs Goods pay tariffs – once imported they are assimilated to domestic good

Korea Beef case Korea beef case Dual retail system: distinct retail distribution system for imported and domestic beef – specialized store for imported beef – larger retailer could sell both but in different department with a display reading imported beef store..) Does the different system of retail distribution modify conditions of competition to the disadvantage of imported beef? Effect of the dual retail system: reduction of retail outlets of imported beef – inconsistency of Article III.4

Scope of Article III Article III only applies to INTERNAL MEASURES (article II and XI apply to border measures) See Ad Article III Note If a good does not satisfy a technical requirement provided for in a domestic legislation and it is stopped at border which article should apply? If a tax applied to national and imported goods is collected at border which article should apply?

Article III.1 National Treatment on Internal Taxation and Regulation 1.The contracting parties 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.* (internal taxes on products NOT on producers) (tax is shifted to the goods (probably)

Article III.2 2.The products of the territory of any contracting party imported into the territory of any other contracting party 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 contracting party shall otherwise apply 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 – interpretative note Interpretative Note ad Article III.2 A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed.

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 favourable 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. * ….

De jure and de facto discrimination Prohibition of de jure discrimination –for fiscal and non fiscal regulations Exemption from a luxury sales tax the sale of categories of motor vehicles “manufactured domestically”: measure which formally discriminates on the basis of origin Italian tractor case formal discrimination

Prohibition of de facto discrimination: no differentiation on the basis of origin. It is necessary to go behind formal text of discrimination – Measure inconsistent with Article III – National treatment – fiscal and non fiscal regulation - can be justified claiming a derogation clause - Article XX

Some questions on Article III.2 Article III.2: Two non-discrimination prohibitions – nature of the relationships between products First sentence. Like – tax in eccess prohibited– any tax in eccess constitutes a violation of Article III.2 first sentence (regardeless the effect on trade?)

Second sentence. If products are directly competitive or Substitutable products – relationship between products: similar, identical, competitive? Article III.2 prohibits a fiscal measure when a)directly competitive or Substitutable are not “similarly taxed” b)The dissimilar taxation is applied as to afford protection to domestic production How do you determine whether to apply the first or the second sentence?

Likeness Like products: no definition. Identical or similar.. (accordion) * Is to be interpreted narrowly, why? (there is a second notion in Article III.2 (note): directly competitive or substitutable product ) Does the aim of the measure can determine likeness? (see malt beverage case and (rejection) by Panel in Japan alcoholic beverage (Panel Report 6.16 where it is explained why it rejected the test)

Likeness JAB Panel reference to like: “The accordion of ‘likeness’ stretches and squeezes in different places as different provisions of the WTO Agreement are applied. The width of the accordion in any one of those places 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 to which that provision may apply.”

Likeness Like in article III.2 first sentence ‘directly competitive or substitutable products.’ (article III.2 second sentence with reference to the Note) Like in article III.4 Are like products the same in par. 4 and par. 2 of Article III?

Likeness Likeness in Article III.2, first sentence: Narrow construction – physical characteristics. Likeness in Article III.2 second sentence + interpretative note – directly competitive or substitutable product Physical characteristics – common end use classification elasticity of substitution cross price elasticity

Likeness Likeness in Article III.4 – competitive relationship among products. Chrysotile asbestos fibres other fibres made from other materials: like products? (AB par. 99; ; 141)

Tax treatment Tax treatment in the first and in the second sentence: - in excess of (de minimis?) is it conditional to the effect text? (Panel 6.24 Japan Alcohol ) Not similarly taxed (AB Report 29-30) So as to afford protection..

Chapeau of Article III – Article III.1 (as the “chapeau” of Article III it applies to all parts of the provisions): So As to afford protection Very problematic interpretative question: does it mean that there is an intention, the purpose to discriminate? Or it refers to the effect of discrimination?

Possible interpretative approaches: Objective approach (followed by AB in Japan Alcoholic Beverages): result – effect of the measure on the competitive relationship between imported and domestic products. Under this approach if a State aims at protecting consumers or public health but the measure has the effect of distorting competition (between Imported and domestic goods) it is caught by the prohibition of article III (and can be maintained only if justified by Article XX)

Aim and effect approach Aim and effect approach- (see Malt Beverage case)* products must be in competition Measure gives an advantage to the importing good PURPOSE of the measure: protection – presumption of bad faith if no plausible reason to explain different impact on the imported good See US argumentation in Japan Alcoholic Beverage

Malt beverage case Mississippi wine tax: lower rate on wines made from a certain grape variety Purpose: protection of local producers only public policy purpose Tax discrimination between types of beer on the basis of alcohol content. Low and high alcohol content need not to be considered like products because the purpose was to encourage consumption of low alcohol content beer

Us taxes on automobiles Luxury tax on cars - disproportionate application to imported vehicles but no protective aim – panel not adopted because EC contested the test (aim and effect)

Comparator approach Focus on the determination of likeness and comparators Comparators can be relevant – irrelevant – illegitimate (skin colour as a legitimate comparator: discrimination on the basis of race would be legitimate because people with different skin colours would be deemed different)

Comparator approach Implicit comparator of likeness is market functionality - substitutability, competition, consumer preference.. – But under this approach the comparator can be challanged

The recycled oil case (refined and recycled oil –Italian case under corresponding provision in the EU Treaty (TFEU) Two types of oil meet the same consumer needs – indistinguishable Lower taxation rate for recycled oil Different outcome of case applying the three approaches

Different approaches different outcomes Approach I: effect discriminatory – measure can be maintained applying derogation article XX* Approach II: measure compatible with article III because no intention of discriminating (Article XX redundant) Approach III: the products are like under market functional comparator but are not like under a different comparator (ecological efficiency) Article III no applicable (article XX redundant)

The regulating state chooses the comparator (it must have a convincing argument before the adjudicator) But the imported products must not be treated less favourably than the domestic (as it was the case in the Italian case of regenerated oil (only domestic regenerated could qualify for tax reduction)