International trade laws play an important role in ensuring fairness and equality in global commerce, particularly regarding the treatment of imported and domestic goods. At the heart of these rules are principles designed to prevent discrimination and promote open competition. This blog explores the key aspects of these trade regulations, such as how taxes and measures affect imported goods, the concept of fair treatment in competitive markets, and the balance between protecting domestic industries and maintaining international commitments.
Has the initial sentence of Article III:2 been broken?
According to Article III:2’s first clause, imported goods cannot be subject to internal taxes or levies of any type that are greater than those that are imposed directly or indirectly to comparable domestic goods. A two-tiered approach for determining whether a measure is an internal tax or charge is outlined in the first language of Article III:2:
- Are the domestic and imported goods “like products”?
- Does the imported product have higher taxes or fees than the domestic one?
It is necessary to ascertain if the internal measure is an internal tax or fee before applying the two-tier test.
Article III:2 covers the following categories of taxes and charges: value added tax, sales tax, and excise duties. Income taxes, on the other hand, are exempt from Article III:2 since they are not a product tax.
Since import duties do not qualify as internal taxes on goods, they are also exempt from Article III:2. The levy or tax must be applied to a product and must be internal. A “pecuniary burden” or “liability to pay money laid on a person” is what is often believed to be a charge. The degree to which a measure qualifies as an internal tax or charge under Article III:2 is unaffected by the purpose or goal behind its implementation.
It should be acknowledged that the National Treatment responsibility under Article III:2 first sentence only applies to “like products” if it has been established that the measure is an internal tax or charge. Panel and Appellate Body Reports offer interpretive guidance because the term is not defined. According to the definition of “like products” in Article III:2, it should be interpreted carefully and case-by-case by looking at pertinent elements such as:
- The final applications of the product in a certain market
- The characteristics, nature, and quality of the product;
- The preferences and behaviours of the consumer;
It is necessary to ascertain if the imported product is subject to “in excess of” the domestic product’s tax after it has been shown that the measure is an internal measure applied to “like products.” The term “in excess of” is not defined, and guidance is provided by a number of Panel and Appellate rulings. Therefore, the de minimis norm of “in excess of” does not exist. Furthermore, the “in excess of” is not quantified using any trade effects test. In fact, even a modest bit of “excess” is excessive.
Has the second sentence of Article III:2 been broken?
Article III:2’s second clause states that Member States are not allowed to impose internal taxes or charges on domestic or imported commodities in a way that goes against the tenets of Article III:1.
The principles generally prohibit discrimination between domestic and imported commodities through internal taxes or charges. Stated differently, they are designed to avoid protectionism.
Additionally, a note in the second sentence of Article III:2 lists situations in which a tax satisfies the conditions of the first phrase. In some instances, the tax might not comply with Article III:2’s second phrase if
- the domestic and imported goods are “directly competitive or substitutable products” that compete with one another;
- the domestic and imported goods are “not similarly taxed”; and
- the directly competitive or substitutable imported goods are subject to different taxes to protect domestic production.
Therefore, only when an internal tax has been determined to be consistent with the first line of Article III:2 will the second sentence be used.
Article III:2’s second clause expands the National Treatment obligation’s application to directly competitive or interchangeable products.
Since “directly competitive or substitutable products” is not defined, Panel and Appellate Body Reports offer help.
According to the Appellate Body, the phrase’s core characterises a specific kind of relationship between domestic and imported goods.
The fundamental aspect of that connection is the competition between the products. Furthermore, the term “substitutable” suggests that there may be a relationship between products in which they can be used in place of one another.
Last but not least, the requirement for a certain level of proximity between the products qualifies their competitive or substitutable nature because they must be directly competitive or interchangeable.
The Appellate Body has also supported a method that examines several variables to assess whether the products are directly comparable or interchangeable.
The following variables could be investigated:
- physical characteristics
- distribution networks
- price relationships, including cross-price elasticities;
- end-uses, including proof of advertising activity; and
- any other features of the products
In contrast to the first statement, the second sentence of Article III:2 stipulates that the tax disparity must be greater than de minimis. Therefore, it is necessary to assess each instance individually to determine whether the differential is de minimis.
It is necessary to ascertain whether the internal tax measure is implemented to protect domestic production after it has been established that the items are not subject to the same taxes. The degree to which the products are taxed differently may, in certain situations, constitute proof of their protective use, but these are still two different questions.
An unbiased analysis of the underlying criteria, structure, and overall implementation is necessary to determine whether a given tax policy protects domestic products.
Has Article III:4 been violated in relation to National Treatment?
Article III forbids discrimination in internal rules and regulations, as well as internal taxes and charges. Internal laws and regulations, as well as the ban on discriminatory application, are covered in Article III:4. According to the Appellate Body, to ascertain if Article III:4 has been violated, three questions must be addressed:
- Is the measure in question a law, rule, or obligation that impacts the internal sale, offering for sale, acquisition, transit, distribution, or product usage?
- Do native and imported goods have similar qualities?
- Is the treatment of the imported product “less favourable” than that of similar domestic products?
It is optional to consider if internal laws or regulations protect domestic output. It is not necessary to take into account if domestic output is protected by internal laws or regulations.
If the relevant measure is a law, rule, or mandate that impacts their internal sale, offering for sale, acquisition, distribution, transportation, or use?
According to the Panel, “laws or regulations” refer to legally binding standards of behaviour under the relevant WTO Member’s domestic legal framework. The Panel has also provided clarification on the phrase “requirement.” It has been made clear that “requirement” and “regulation” are not interchangeable terms. Furthermore, the word “requirement” connotes two different circumstances:
- First, it refers to duties that a business is “legally bound to carry out” and
- Second, it refers to duties that a business willingly takes on to receive a government benefit.
The internal sale or purchase, transportation, distribution, or usage must be “affected” by the laws, rules, or requirements. The definition of “affect” is “a measure that has ‘an effect on’,” indicating a wide range of applications.
According to one interpretation, the term “affecting” in Article III:4 of the GATT refers to both laws and regulations that directly control the terms of sale or purchase and any laws or regulations that could negatively alter the terms of competition between domestic and imported goods.
Do native and imported goods have similar qualities?
The Appellate Body explained that the following elements should be considered to assess the similarity of the imported and domestic items.
- the characteristics, nature, and quality of the items;
- the products’ intended uses;
- consumer preferences and behaviours—more broadly, consumer perceptions and behaviour—about the products; and
- the products’ tariff categorisation
However, the list is not all-inclusive, and each relevant information should always be considered individually.
Does a similar domestic product receive "less favourable" treatment than an imported one?
The panel explained that “effective equality of competitive opportunities” is “treatment no less favourable.” In many cases, the Appellate Body has consistently applied this. The Appellate Body further clarified that different treatments alone cannot meet these criteria. Differential treatment that makes the imported product “less favourable” is needed.
The concept of market access in the trade in of goods
The market access concept governs all government-imposed restrictions on a good’s ability to enter a Member State’s market, including:
- Tariffs, often known as customs duties;
- additional levies and fees
- quantitative limitations, often known as quotas, and
- non-tariff obstacles (such as technical rules, sanitary and phytosanitary measures, and customs processes)
Tariffs for market access
A monetary fee imposed on an item during importation is known as a tariff or customs duty. The item’s importation may also be the reason for its imposition.
This usually occurs when a tariff is assessed or collected later rather than upon importation. For instance, an item brought into a bonded warehouse will not be subject to import duties, but it will be subject to payment after it is removed from the bonded warehouse.
The tariff is the market access requirement for importing the product. Additionally, several nations levy export-related levies. The main distinction between import and export tariffs is that the former is imposed on exports.
Tariffs can take many different shapes. Some of the various tariff kinds are:
| Tariff Type | Description | Example |
|---|---|---|
|
Specific |
The tariff is calculated based on a unit of measurement (such as weight or volume) |
£1.50 per kg |
|
Ad valorem |
The tariff is calculated as a percentage of the value of the goods |
15% (if the value of the good is £1000, the tariff would be £150) |
|
Mixed |
The tariff is calculated as an alternative between the specific and ad valorem duty. It is either a maximum or a minimum duty |
15%, but no more than £1.50 per kg (the maximum duty)
15% or £1.50 per kg whichever is less (the minimum duty) |
|
Compound |
The tariff is calculated as an ad valorem duty to which a specific duty is added. It may also irregularly happen that the specific duty is subtracted |
15% plus £1.50 per kg |
|
Technical |
The tariff is calculated based on specific contents/components |
£1.50 per kg of sulphur dioxide
15% per refrigerator plus 45% on sulphur dioxide |
The WTO allows the use of tariffs. Instead, tariffs shield home sectors from import competition is acknowledged. Duties were already recognised as a significant trade barrier under the GATT 1947, and member states were required to engage in periodic negotiations to lower or bind duties. Many of these discussions occurred during the many rounds of GATT negotiations that resulted in the creation of the WTO. As additional Member States joined the WTO, some talks occurred.
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