Major Distinction between Article III.2 and III.4 of GATT
Articles in Question:
Article III.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.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. 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.
The basic purpose of Article III of GATT is to prohibit less favorable treatment against imported goods as against domestic product when the imported goods enter the market. The intention of the drafter was clear to treat imported goods at par with domestic product so as to reduce the concept of protectionism. Panels and scholars have affirmed that one of the main purposes of Article III is to guarantee that internal measures of WTO Members do not undermine their commitments regarding tariffs under Article II.
Major Assessment of Article III.2:
The question which arises out is whether Article III also applies to such cases where there is no ‘domestic product’. The panel in the case of EC-Asbestos clearly specified that even such case will fall under the domain of Article III and Article XI: 1 will not have any implications on the same.
The purpose of Article III:1 is to establish this general principle as a guide to understanding and interpreting the specific obligations contained in Article III:2 and in the other paragraphs of Article III, while respecting, and not diminishing in any way, the meaning of the words actually used in the texts of those other paragraphs.
The general principle that internal measure must not be applied so as to provide protection to domestic product with regard to internal taxation is elaborated in Article III.2 and ‘Internal regulations’ with regards to Article III.4. Article III.2 sets out a two tier mechanism of regulations on ‘Internal Taxation’,one need to prove two points to show violation of the same.1. Whether the imported product and the domestic products are like? 2. Whether the imported product is taxed in excess of the domestic product? If the answers to both the questions are in affirmative the same will tantamount to violation of Article III.2. The first sentence of the same concerns about internal taxation and charges of any kind to be applied on imported goods for example sales tax, excise duty etc. The words ‘applied directly or indirectly on products’ should be understood to mean ‘applied on or in connection with products’. It has been suggested that a tax applied ‘indirectly’ is a tax applied, not on a product as such, but on the processing of the product. A penalty provision for the enforcement of a domestic law is not an ‘internal tax or charge of any kind’ within the meaning of Article III.2.
The Appellate Body in Japan – Alcoholic Beverages II addressed the scope of the concept of ‘like products’ within the meaning of Article III.2, first sentence. The Appellate Body first stated that this concept should be interpreted narrowly because of the existence of the concept of ‘directly competitive or substitutable products’ used in the second sentence of Article III.2. But still it was strongly felt that the interpretation of the term should be examined on a case-by-case basis. This would allow a fair assessment in each case of the different elements that constitute a “similar” product.
Pursuant to Article III.2, first sentence, internal taxes on imported products should not be ‘in excess of’ the internal taxes applied to ‘like’ domestic products. Even the smallest amount of “excess” is too much. The prohibition of discriminatory taxes in Article III.2, first sentence, is not conditional on a ‘trade effects test’ nor is it qualified by a de minimis standard.
When we give full meaning to the text and context to the second sentence of Article 3.2 we need to determine three essential issues:
a. Whether imported product or domestic product is directly in competition with each other?
b. That both the competitive products are differentially taxed.
c. The dissimilar taxing situation has occurred to provide protection to domestic product.
Major Assessment of Article III.4:
When one talks about article III.4 a three tier test of consistency of internal regulations with the provision is applied and thus requires the examination of whether:
· The measure at issue is a law, regulation or a requirement covered by Article III.4.
· The imported product and the domestic product are like products.
· The imported products are accorded less favorable treatment.
Points of Distinction:
Although the obligations in Articles III.2 and III.4 both apply to “like products”, the text of Article III.2 differs in one important respect from the text of Article III.4. Article III.2 contains two separate sentences, each imposing distinct obligations: the first lays down obligations in respect of “like products”, while the second lays down obligations in respect of “directly competitive or substitutable” products. By contrast, Article III.4 applies only to “like products” and does not include a provision equivalent to the second sentence of Article III.2.The scope of likeness is broader in III.4 as compared to III.2. The two separate obligations in the two sentences of Article III.2 must be interpreted in a harmonious manner to give meaning to both the sentences in the provision.
The “no less favourable” treatment requirement set out in Article III.4 is unqualified. These words are to be found throughout the General Agreement and later Agreements negotiated in the GATT framework as an expression of the underlying principle of equality of treatment of imported products as compared to the treatment given either to other foreign products, under the most favoured nation standard, or to domestic products, under the national treatment standard of
Article III. The practical interpretative issue between paragraph 2 and paragraph 4 of Article III was: which difference between the products may form the basis of regulatory distinction by government which accords less favourable treatment.
Another point of distinction between the two paragraphs is that, if we even consider the two product to be like while fulfilling the requirement of Article III.4 we need to prove that the measures accords to the group of “like” imported products less favourable treatment than it accord to the group of “like” domestic products.
Finally the author would like to recall the ‘aim and effect’ test. The current status of the intent and effect is fairly clear in Article III.2, second sentence. For the other two provisions the things are not quite clear. Some commentators have contended that the appellate body has moved toward the ‘aim and objective’ test for III.4 in EC-Asbestos and Dominican Republic –Cigarettes. This case somehow cures the disease of interpretation but it would be only fair to say that the courts are still not confident about the interpretation of Article III.2 and III.4. The author would also like to suggest that true interpretation can only be derived if both the paragraphs would be construed harmoniously.
# GATT Panel Report, US – Section 337, paragraph 5.10
# GATT Panel Report, Italian Agricultural Machinery, paragraph 11.
# See e.g. Panel Report, Japan – Alcoholic Beverages II, paragraph 6.13
# Panel Report, EC – Asbestos, paragraphs 8.89 and 8.91.
# Appellate Body Report, Japan – Alcoholic Beverages II, 111.
# Appellate Body Report, Canada – Periodicals, 468.
# Appellate Body Report, Japan – Alcoholic Beverages II, 111-112.
# Panel Report, Argentina – Hides and Leather, paragraph 11.137.
# GATT Panel Report, US – Tobacco, paragraph 80.
# Appellate Body Report, Japan – Alcoholic Beverages II, 112-113
# Report of the Working Party on Border Tax Adjustments, BISD 18S/97, paragraph 18
# Ibid. See also Panel Report, Argentina – Hides and Leather, para. 11.244.
# Appellate Body Report, Canada – Periodicals, 470, and in Appellate Body Report, Chile – Alcoholic Beverages, paragraph 47.
# Appellate Body Report, EC – Bananas III, paragraph 216
# Appellate Body Report, EC – Asbestos, paragraph 94
# GATT Panel Report, US – Section 337, para. 5.11
# Appellate Body Report, Korea-Beef at, 135
# J Pauwelyn, “The Unbearable Lightness of Likeness”, a review of Mireille Cossy, Some Thoughts on The Concept of ‘Likeness’ in the GATS, WTO Staff Working Paper ERSD-2006-08
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