Non-discrimination Principle in GATT Law - Research Paper Example

Non-discrimination Principle in GATT Law Introduction The current world financial crisis precipitated by credit crunch squeeze in the rich developed countries has strained trade relations among countries that have been forced to retreat domestically offering protection to their local companies in efforts to stem economic catastrophe. Bilateral and multilateral trade agreements are essential to ensure world trade is constant as the converse will only heighten the present problems. The international community therefore has conjured a mechanism that ensures free trade concessions and amicable non-discriminatory trading among member countries. This is mainly based on the General Agreement on Trade and Tariffs (GATT). Background The General Agreement on Trade and Tariffs (GATT) was formulated in 1947 as a forum for regulating international trade, negotiating trade agreements, and settle trade disputes. The forum used to meet in sittings called ‘rounds’ and there were eight such rounds1. Essentially the GATT which evolved into the World Trade Organisation (WTO) after the 1986-1994 Uruguay Rounds of negotiations is an organisation for liberalising trade which operates a system of trade rules which provide the legal rudiments for international commerce. This binding agreements or contracts assist governments, traders and consumers of goods and services provision which are arrived at the periodic meetings known as negotiating rounds. The tariffs on manufactured products were reduced from a trade-weighted average of 35 percent in the pre-GATT to 6.4 percent after the Uruguay Round in 1986. According to its preamble, the purpose of GATT is, “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis" (WTO, 2005, p. 1). WTO and its predecessor GATT have successfully negotiated various agreements for over 50 years reducing tariff and trade barriers for their 146 members who make up almost 97 percent of world trade. The Non-discrimination Principle The main tenets of GATT agreements and the subsequent WTO have been reciprocity and non-discrimination. Reciprocity occurs among the GATT member countries when one offers concession of trade barrier reduction to one country and the other country grants a similar reciprocal compromise. Non-discrimination however refers to the same cooperation being extended to all other GATT member countries. Reciprocity is therefore a practice of exchanging tariff concessions which boosts trade barrier cutbacks. These basic principles of reciprocity and non-discrimination therefore emphasise the need for fairness in trade and enhance efficiency among the GATT countries while serving as the main precepts of the GATT negotiations and agreements. This is exemplified in Article I: 1 of the GATT 1994 most-favoured-nation (MFN) treatment obligation which provides that no GATT member should discriminate against products emanating from another GATT member country2. The non-discrimination aspect has two major underlying principles that are essential to the GATT: the Most-Favoured-Nation principle and the National Treatment Obligation. This two principles form the basis of all GATT and subsequent WTO agreements. The Most-Favoured-Nation (MFN) 3principle outlined in Article 1 of GATT emphasize that each member country must grant other member countries the most favoured status or treatment that it extends to any country in regards to imports and exports. General Most-Favoured-Nation Treatment Article I: 1 of the GATT 1994 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 paragraphs 2 and 4 of Article III,* 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]4 The National Treaty Obligation The principle of National Treatment (NT) outlined in Article III of GATT however deals with discrimination between imports and locally manufactured products. The section calls for equitable treatment of both imported and locally produced products. The function of Article 111:1 is to make certain that local regulations are ““not be applied to imported or domestic products so as to afford protection to domestic production (Article III: 1)”5. Members are discouraged from offering preferential treatment to their domestic producers to the disadvantage of foreign producers of specific products in their trade policies. This exemplified in countries requiring imported goods to be of higher technical standards than those locally assembled products in a form of discrimination6. Jean Monnet7 (2004) has argued that the principle of National Treatment (NT) in Article III is quite similar to the principle of reasonableness provided in Article XX GATT 1994 whereby the latter principle requires governments to accord a minimum level of treatment using an “absolute” standard. He argues that the reasonableness principle which is broad in outlook encompassing concepts like ‘suitability’, ‘necessity’, ‘proportionality’, ‘transparency’ and ‘participation’ submerges the NT principle. An example of the WTO and NAFTA agreements efforts of promoting trade and investments in North America highlights the conformity of the two concepts. These are as contained in Articles III/XX GATT and 1102 NAFTA; Articles 2 TBT and 1105 NAFTA. Monnet alludes to the pre-eminence of the reasonableness principle as compared to the National Treatment (NT) principle but does not advocate the abandonment of the non-discrimination principle. The principle of non-discrimination has been credited with enhancing international trade relations that have resulted in many major trade agreements with its two tenets of the most-favoured-nation treatment obligation (MFN) and the national obligation. The MFN main precept is a requirement among all GATT/WTO signatories to desist discrimination between products. Hudec also argues that the reciprocity article is in conflict with the non-discrimination rules contained in Article 1:1 of the GATT. He asserts that the reciprocity feature whereby a country that does not return the favour of trade concessions faces discriminatory repercussions from the other which contradicts the principle of non-discrimination and encourages unfair trade (Hudec, 2003). The GATT arrangement has nevertheless allowed constant negations over grey areas in their trade treaties. To establish whether there are violations in the MFN treatment obligation of the Article 1: 1 of GATT 1994, the accord provides for a three-tier test. This includes establishing whether an advantage has been accrued on the products derived from or destined for GATT member countries. Secondly, do the concerned products duplicate or “like”? Thirdly, whether the particular advantage was conceded or granted “immediately and unconditionally”8 to all similar or ‘like products’9? ‘Like Product’ Concept The ‘like product’10 concept is aimed at reducing negative competitiveness which leads to substitutability. This theory is illustrated in the Japan – Alcoholic Beverages II,11 ruling where the Panel commented that, “The concept of “likeness” is a relative one that evokes the image of an accordion. 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.”12 This are found in Articles I and III which outlines rules barring discrepancies in treatment of some products to deter warped competitive altitudes and in Articles VI and XIX, the GATT rules are aimed at protecting manufacturers from unfair or harmful imports. The Article 1:1 of the GATT 1994 itemise the measures that confer advantages13 to a country’s products. These include: All tariffs and charges enacted to deter imports or exports, the system of levying the tariffs, the regulations and process in conducting imports and exports, the domestic taxes and levies, local regulations and laws involving trade. The notion of “like products” is similarly outlined in Articles II:2(a), III:2, III:4, VI:1(a), IX:1, XI:2(c), XIII:1, XVI:4 and XIX:1 of the GATT 1994 though it has not been formerly defined within the treatise. It has however been extensively discussed in other various GATT and WTO reports (UNCTAD, 2003). Articles and Case Studies In Article III of the GATT 1994, the same provision of non-discrimination is extended to the principle of “national treatment” (NT) that is also one of the cornerstones of the non-discrimination principle. This provides that internal taxes and regulations are not used to camouflage protectionist or discriminatory practices against imported goods. The rationale behind Article III: 1 is to guarantee that non-discriminatory techniques are: “not be applied to imported or domestic products so as to afford protection to domestic production (Article III: 1)”14 Article 1:1 of the GATT 1994 oblige a WTO member country to accord an advantage granted to WTO member country “immediately and unconditionally” to all other WTO member countries. This necessitates WTO members to practice non-discriminatory policies across the board and cannot impose sanctions or tariffs against another WTO member country hence extend any advantage accorded a certain country to the other members. This concept was illustrated by a WTO Panel in the US – Non-Rubber Footwear case15. The Panel explained: The Panel … considered that Article I: 1 neither does nor permits balancing more favourable treatment under some procedure against less favourable treatment under others. If such a balancing were accepted, it would entitle a contracting party to derogate from the most-favoured-nation obligation in one case, in respect of one contracting party, on the ground that it accords more favourable treatment in some other case in respect of another contracting party. In the view of the Panel, such an interpretation of the most-favoured-nation obligation of Article I: 1 would defeat the very purpose underlying the unconditionality of that obligation This ruling was also upheld in the Indonesia – Autos16, whereby Indonesian car industry processes including her customs duty and other levies were inconsistent with Article 1:1. The country had imposed certain regulatory standards on finished car values on products from the Republic of Korea hence instructed that the Korean products be accorded same advantage as other member countries “immediately and unconditionally”. This was also the case in Canada – Autos17 case whereby the Appellate Body ruled that Canada was arbitrary according duty exemption to certain countries while discriminating against others over motor vehicle importations against the Article 1:1 of the GATT 1994 accord. In US – Certain EC Products18, the United States was found to be acting against the principles of most-favoured-nation (MFN) obligation as it raised the bonding requirements of certain products imported from the European Union countries. This was done by the US as retaliatory measure against the EUs Community banana import regime but the WTO Panel ruled that since other ‘like products’ from other nations were not being imposed with the same requirements, it was discriminatory on the EC. In the National Treatment Obligation of Article III which provides for equitable treatment to imported products vis-à-vis domestic products, the Appellate Body in Japan – Alcoholic Beverages II19, underlined the principle of non-discrimination to avoid protectionism hence argued, “… Article III obliges Members of the WTO to provide equality of competitive conditions for imported products in relation to domestic products” (UNCTAD, 2003, p. 23). This was emphasized in Korea – Alcoholic Beverages, whereby the Appellate Body argued that to deter protectionism, competitive conditions must be maintained and enhanced. This panel also clarified that Article III of the GATT 1994 like Article I was not confined to products which subjected to tariff concessions as in Article II of the 199420 accord though Article III of the GATT 1994 is proposed to deal with internal regulations. However the Appellate Body argued in the Japan – Alcoholic Beverages II that, “(WTO, 2003). 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 paragraphs21. The NT can therefore be only violated when Article III: 2 is disregard. This is determined by querying whether the imported and local goods are ‘like products’ or whether the imports are overtaxed as compared to the domestic goods. This was illustrated in the Argentina – Hides and Leather22 whereby Argentina required the pre-payment of certain taxes by some importers, the Panel ruled that every time goods from certain member territories are subjected to extra taxation including value added taxes (VAT), sales taxes and excise duties, over those extended to similar ‘like products’ of local goods, the country is deemed to be exercising protection to its domestic goods against the tenets of Article III: 1. This was further emphasized in the Japan – Alcoholic Beverages II23, when the Appellate Body ruled that “even the smallest amount in excess is too much” of taxation. The Appellate Body stated that, “… it is irrelevant that the “trade effects” of the tax differential between imported and domestic products, as reflected in the volumes of imports, are insignificant or even non-existent; Article III protects expectations not of any particular trade volume but rather of the equal competitive relationship between imported and domestic products.” (WTO, 2003, p. 23) In Article III: 2 second sentence of the national treatment obligation which states “directly competitive or substitutable products”, a wider classification is depicted than ‘like products’. This is illustrated in the Canada – Periodicals24 in which the Appellate Body ruled that products don’t have to be necessarily substitutable for them to be termed as “directly competitive or substitutable” since a situation of “perfect substitutability” is found in Article III: 2 first sentence. This concept of ‘perfect substitutability’ was explained Korea - Alcoholic Beverages25, when the Appellate Body observed that products are “directly competitive or substitutable” if they are interchangeable or offer optional ways of fulfilling a certain need or taste. The Appellate Body also determined that cross-price elasticity of demand which in economic terms depicts change in demand of products is reflective of the changes in taxation levels is not the critical factor to ascertain whether the products “directly competitive or substitutable”26. In Article III: 4 which outlines national treatment obligation direction on internal laws and regulations together with issues of internal taxation, a violation is determined through three main enquiries: whether the measure used is rules, regulations, and levies that affect sales decisions; whether the imports are similar or ‘like products’ to the local goods’; and whether the imports are accorded differential treatment as compared to the local products. The non-discrimination obligation in Article III: 4 concerns the treatment of ‘like products’ as in Articles I: 1 and III: 2. The Appellate Body in the EC – Asbestos ruling observed that the concept of ‘like products’ in Article III: 4 are broader than in the concept of Article III: 2 “In endeavouring to ensure “equality of competitive conditions”, the “general principle” in Article III seeks to prevent Members from applying internal taxes and regulations in a manner which affects the competitive relationship, in the marketplace, between the domestic and imported products involved, “so as to afford protection to domestic production.” (UNCTAD, 2003, p. 42) Potts (2007) faults the GATT/WTO for not having a conclusive definition of ‘like products’ as it results in ambiguity especially when considered in light of environmentally27 friendly products (Potts, 2007). However the Working Party Report on Border Tax Adjustment has attempted a definition which is elucidated better in the Report on Border Tax Adjustment adopted by GATT in 1970 determined that: ‘like products’ shall be resolved on a case-by-case basis not withstanding any set rules and that the issues to be determined for analysis to include either, product consumers, the consumer preferences and inclinations, and the composition of the product28. There are nevertheless a number of measures which have been found to be inconsistent with the national treatment obligation Article III: 2 including US – Section 337, Korea – Beef and US – Gasoline rulings. Other issues are in the minimum price requirements, domestic transport regulations, banana quota tariff allocation, and the Canadian VAT requirements on motor vehicles. Pearce (2005) argues that although free trade is beneficial to humanity, the GATT/WTO should also focus on environmental issues especially where the various aspect of free trade has been found to generate ecological hazard. The US – Tuna/Dolphin29 ruling is cited as an example of an extraneous decision when GATT rules were used to rule against the US in its decision to bar Mexican imports of tuna fish due to the fatal effects of their fishing nets against dolphins. Pearce argues that GATT rules lack barriers against ‘processes’ or ‘methods of production’ but only considers ‘products’ hence ignoring production externalities while accepting only consumption externalities30. Potts (2007) also criticizing the decision argues that the treatment of process and production methods (PPMs) 31within the framework of GATT/WTO is inconsistent with its principles of non-discrimination to affect policies particularly on sustainable development. While the non-discrimination principle has been propagated as underlining policy in the GATT/WTO agreements and decisions, there are however a number of exceptions to the rule. This includes exceptions granted to regional trade agreements (free-trade areas and customs unions) and individual governments administered protectionism. The exceptions were recognized even in the GATT formative year of 1947 when the forum acknowledged that some regions or governments might consider the pace of GATT initiated trade pacts too slow and want to accelerate their own regional trade pacts. The forum therefore endorsed the formation of two types of regional trade pacts, namely, free trade areas and custom unions. Free trade areas allowed regional member countries to enter their own unique regional pacts of free trade with one another while maintaining their original tariffs with the rest of world. In the customs union, the regional members set a similar external tariff with the rest of the world. This external tariff is construed to be equivalent or no higher than a weighted average of individual regional member countries before the formation of their unique external customs union.32 The formation of regional trading centres has been criticised for diverting trade form non-regional partner states to the newly created trading zones. Viner (1950) termed it as ‘trade creation and trade diversion’ in the regional trade agreement (RTA) whereby the reduction or wiping out of tariffs amongst these regional trading blocks leads to trade creation within their dominions while discriminating against other GATT/WTO member countries. These regional trading entities reduce global trade efficiency particularly if a non-RTA state has a lower priced product that is barred by their common regional external tariffs. However Sampson (1996) has disputed this arguing that the issue of trade creation and diversion is less relevant currently due to the negligible tariffs imposed which is unlikely to divert trade33. In the locally initiated administered trade protection which is allowed by GATT 1994 in Article VI as per The Tokyo Round Framework Agreement, temporary tariffs are used on various grounds. GATT/WTO believes these internally administered tariffs can foster better global trade. They are generally trade restrictions aimed at providing fortification from imports in addition to those provided for under GATT. This allow countries to impose antidumping duties, countervailing levies, and other safeguard measures that help the country work on its balance of payments problems. Although provided for under Article XII, these techniques are against the principles of non-discrimination advocated by GATT as provided in Article I and Article XIII 1994 Uruguay eighth round. The US34 has been known to apply them discriminately as it imposes country-specific antidumping tariff often due to political expediencies rather than protection of domestic products. Safeguard measures35 are temporary tariffs aimed at protecting domestic products from superior foreign products while antidumping and countervailing levies are those intended to protect domestic industry from products that are presumed to have an unfair advantage. Although GATT rules advocate for non-discriminatory safeguard measures, a majority of countries practising them use them indiscriminately which leads to various disputes often brought forward to the WTO Panels. The current global meltdown has seen some countries violate the non-discriminatory principle to safeguard domestic industry and try to spur local economic growth. In the US the federal government has imposed import tariffs on steel from many exporting countries into their markets. The WTO dispute resolution body has termed this as violations as some countries like Canada and Mexico have been granted exemptions to these tariffs. Srinivasan (2005) has castigated the predominance of exceptions to original principles of GATT of non-discrimination that have dominated contemporary GATT/WTO agreements. The recent inclusion of services, intellectual property and some trade-related venture measures as diluting the original agreements. He argues further that the conventional issues of tariff and non-tariff barriers have been obscured by contemporary matters that are minimally founded on the original principle of non-discrimination36. Conclusion The non-discrimination principle as set in the preamble of the GATT 1994 agreement signed at the last round in Uruguay has remained the main basis for all the trade treaties entered by members on all its rules. Although there are some few exceptions, mainly in the regional settlements and self administered safeguard measures, the principles of fairness in trade has been maintained due to the non-discrimination aspect. There are however prevalent challenges to the GATT/WTO foundation as result of various violations by member states who frequently contravene the agreements for individual benefits. The major violations are found in the antidumping tariffs which have been found to be administered discriminately by some states like the United States and European Union countries. Other challenges facing the GATT/WTO rules are the obligation to consider inclusion of environmental factors in the rules. The non-discrimination principle particularly in the ‘like products’ interpretation must consider other factors other than just the mere end-products while disregarding issues of production and origin of the product. This are considered important issues especially in view of countries violating the environment and human rights abuses. A fresh inclusion of contemporary issues in the GATT rules that are beneficial also to the developing countries will help sustain the principle of non-discrimination as advocated by GATT 1994 and preceding rounds of agreements. Bibliography SA Aaronson, ‘From GATT to WTO: The Evolution of an Obscure Agency to One Perceived as Obstructing Democracy’ [2008] Accessed 25 April 2009 from EH.Net Encyclopedia: ADB ‘World Trade Organisation: Non-Discrimination Principles’ [2009] Accessed 25 April 2009 from Asian Development Bank Raj Bhala and Kennedy Kevin ‘World Trade Law The GATT-WTO System, Regional Arrangements and U.S. Law’ LEXIS Law Publishing [1998] Charlottesville Va. 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