DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY

INTERNATIONAL TRADE LAW

PROJECT

Topic: PRINCIPLE OF NATIONAL TREATMENT AND FISCAL

MEASURE

SUBMITTED TO: SUBMITTED BY:

Ms. PriyaAnuragini Shailesh Kumar
Assistant Professor (Law) Semester VII
Dr. RMLNLU Enroll NO. 150101120
B.A. LLB (Hons.)

1
TABLE OF CONTENTS

Contents
INTRODUCTION .......................................................................................................................... 3
Meaning of “National Treatment” ............................................................................................................ 3
Objectives of National Treatment Principle.............................................................................................. 3
LEGAL FRAMEWORK ARTICLE III GATT .............................................................................. 3
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 ............................................................................................................................. 6
ECONOMIC IMPLICATIONS ...................................................................................................... 7
CONCLUSION ............................................................................................................................... 8
BIBLIOGRAPHY ........................................................................................................................... 9

2
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
tomaintain the balance of rights and obligations, and is essential for the maintenance of the
multilateral trading system.

LEGAL FRAMEWORK 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,

3
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 Case1was 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 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

1
Japan Alcoholic Beverages Case WT/DS8/15.

4
 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
objective provided they do so in compliance with Article III(2).3

2
1970 Report of the Working Party on Border Tax Adjustments, BISD 18S/97, ¶ 14
3
Japan — Taxes on Alcoholic Beverages, WT/DS8/AB/R,.

5
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.

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

6
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 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.

7
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.

8
BIBLIOGRAPHY

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.