Important Considerations

Products with unbound duty: A Member cannot justify a higher internal tax rate on an imported product on the grounds that it could, in any case, apply a higher tariff on the product not subject to tariff binding.

Balancing not allowed: The obligation of national treatment has to be undertaken as applicable to each individual case of imported products. Thus less favorable treatment accorded to an imported product cannot be justified on the grounds that it has received more favorable treatment in another way, or that another product from the exporting country has received more favorable treatment.

Different regional treatment: When a domestic product is given different treatment in different regions of a country, the treatment which is the most favorable among these is to be accorded to the like imported product.

Measure having negligible effect: Some countries, while defending measures which seemingly violate the obligations of national treatment, have argued that the measures had only a negligible effect on trade and that, therefore, they cannot be causing adverse effects on the imported products. In the course of consideration of this issue in the past, the position which is well established by now is that the actual trade effect is not an important point to be considered; what is crucial to the issue is whether competitive conditions for the imported products in relation to domestic products have been adversely affected. A measure is considered inconsistent with Article III of GATT 1994 if it disturbs the competitive conditions of the imported products getting more favorable treatment compared to the imported products may be negligible in quantity or even if the domestic products might not have effectively received any advantage from the measure. Thus, even in the absence of a trade effect, a case of violation could occur.

For example, the Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992) examined a complaint regarding the reduction of excise duty for some domestic products. In the Panel hearing, the US argued that only 1.5% of domestic beer was eligible for the reduction in the excise tax on beer and less than 1% benefited from the reduction, hence, the tax neither discriminated against imported beer nor provided protection to domestic production. The Panel was of the opinion that Article III protects competitive conditions between imported and domestic products and that this protection is not conditional on trade effects.

Exceptions.

The obligation of national treatment does not apply to laws, regulations or requirements governing government procurement where products are purchased for the use of the government and not for commercial resale nor for use in production of goods for commercial resale.

The obligation of national treatment does not prevent payment of subsidies exclusively to domestic producers. In this connection, a US tax measure providing credit against excise taxes to domestic producers of beer and wine came up for consideration in the Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992). The US argued for exemption from the obligation of national treatment on the grounds that the measure in question was in the nature of a subsidy. The Panel noted that the word “payment” of subsidies in Article III refers only to direct subsidies involving payments and not to other measures like tax credits or tax reduction.

A new exception appears in the Uruguay Round Agreement on Subsidies and Countervailing Measures. Subsidies contingent on the use of domestic goods over imported goods are allowed, in the case of developing countries, for five years from the date of the coming into force of the WTO Agreement. For the least developed countries, they are allowed for eight years from that date.

The local content requirement (requirement that permission for investment will be conditional on the use of domestic products to some extent) and the limitation on the use of imported products (related to the value or volume of the domestic products that the firm exports) have been declared to be inconsistent with the obligations of Article III of GATT 1994 in the Agreement on TRIMs. Developed country Members have, however, been given two years from the coming into force of the WTO Agreement to eliminate these measures if they have them. For developing Members, this period is five years and for least developed country Members, it is seven years.

Emerging Problems.

So far, the criteria of determining like products have been based on the characteristics of the products; attempts have been initiated to broaden the scope so as to include in the criteria even the method of production of the products. This is the emerging problem. For example, suppose the imported product is produced in factories which pollute the environment by discharging harmful fluids into the neighboring river. At present, this aspect of the production will be totally irrelevant in comparing this imported product with the domestic product having similar composition, use and other characteristics. The domestic product and the imported product will be considered like products, and, as such, the imported product will have the benefit of national treatment.

Now, attempts are being made to distinguish the imported product from the domestic product on the grounds of whether the production process of the former causes pollution to the environment. If this is accepted as a criterion for determining the like product, the imported product will be declared as not being a like product, and thus will not have the benefit of national treatment.

Progressive trade liberalization and Transparency