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WTO ANALYTICAL INDEX: GATT 1994 General Agreement on Tariffs and Trade 1994 |
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> General
Agreement On Tariffs And Trade 1994 |
Article II: Schedules of Concessions 1. (a) Each contracting party shall accord to the commerce of the other contracting parties treatment no less favourable than that provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement.
(b) The products described in Part I of the Schedule relating to any contracting party, which are the products of territories of other contracting parties, shall, on their importation into the territory to which the Schedule relates, and subject to the terms, conditions or qualifications set forth in that Schedule, be exempt from ordinary customs duties in excess of those set forth and provided therein. Such products shall also be exempt from all other duties or charges of any kind imposed on or in connection with the importation in excess of those imposed on the date of this Agreement or those directly and mandatorily required to be imposed thereafter by legislation in force in the importing territory on that date.
(c) The products described in Part II of the Schedule relating to any contracting party which are the products of territories entitled under Article I to receive preferential treatment upon importation into the territory to which the Schedule relates shall, on their importation into such territory, and subject to the terms, conditions or qualifications set forth in that Schedule, be exempt from ordinary customs duties in excess of those set forth and provided for in Part II of that Schedule. Such products shall also be exempt from all other duties or charges of any kind imposed on or in connection with importation in excess of those imposed on the date of this Agreement or those directly or mandatorily required to be imposed thereafter by legislation in force in the importing territory on that date. Nothing in this Article shall prevent any contracting party from maintaining its requirements existing on the date of this Agreement as to the eligibility of goods for entry at preferential rates of duty.
2. Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product:
(a) a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III* in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part;
(b) any anti-dumping or countervailing duty applied consistently with the provisions of Article VI;*
(c) fees or other charges commensurate with the cost of services rendered.
3. No contracting party shall alter its method of determining dutiable value or of converting currencies so as to impair the value of any of the concessions provided for in the appropriate Schedule annexed to this Agreement.
4. If any contracting party establishes, maintains or authorizes, formally or in effect, a monopoly of the importation of any product described in the appropriate Schedule annexed to this Agreement, such monopoly shall not, except as provided for in that Schedule or as otherwise agreed between the parties which initially negotiated the concession, operate so as to afford protection on the average in excess of the amount of protection provided for in that Schedule. The provisions of this paragraph shall not limit the use by contracting parties of any form of assistance to domestic producers permitted by other provisions of this Agreement.*
5. If any contracting party considers that a product is not receiving from another contracting party the treatment which the first contracting party believes to have been contemplated by a concession provided for in the appropriate Schedule annexed to this Agreement, it shall bring the matter directly to the attention of the other contracting party. If the latter agrees that the treatment contemplated was that claimed by the first contracting party, but declares that such treatment cannot be accorded because a court or other proper authority has ruled to the effect that the product involved cannot be classified under the tariff laws of such contracting party so as to permit the treatment contemplated in this Agreement, the two contracting parties, together with any other contracting parties substantially interested, shall enter promptly into further negotiations with a view to a compensatory adjustment of the matter.
6. (a) The specific duties and charges included in the Schedules relating to contracting parties members of the International Monetary Fund, and margins of preference in specific duties and charges maintained by such contracting parties, are expressed in the appropriate currency at the par value accepted or provisionally recognized by the Fund at the date of this Agreement. Accordingly, in case this par value is reduced consistently with the Articles of Agreement of the International Monetary Fund by more than twenty per centum, such specific duties and charges and margins of preference may be adjusted to take account of such reduction; provided that the CONTRACTING PARTIES (i.e., the contracting parties acting jointly as provided for in Article XXV) concur that such adjustments will not impair the value of the concessions provided for in the appropriate Schedule or elsewhere in this Agreement, due account being taken of all factors which may influence the need for, or urgency of, such adjustments.
(b) Similar provisions shall apply to any contracting party not a member of the Fund, as from the date on which such contracting party becomes a member of the Fund or enters into a special exchange agreement in pursuance of Article XV.
7. The Schedules annexed to this Agreement are hereby made an integral part of Part I of this Agreement. Ad Article II: Paragraph 2 (a) The cross-reference, in paragraph 2 (a) of Article II, to paragraph 2 of Article III shall only apply after Article III has been modified by the entry into force of the amendment provided for in the Protocol Modifying Part II and Article XXVI of the General Agreement on Tariffs and Trade, dated September 14, 1948.(1)
(footnote original) 1 This Protocol entered into force on 14 December 1948. Paragraph 2 (b) See the note relating to paragraph 1 of Article I. Paragraph 4 Except where otherwise specifically agreed between the contracting parties which initially negotiated the concession, the provisions of this paragraph will be applied in the light of the provisions of Article 31 of the Havana Charter. 48. In US - Certain EC Products, the Appellate Body reversed the Panel's finding that the United States had acted inconsistently with Article II:1(a) and (b) of GATT 1994, first sentence, by increasing the bonding requirements on certain products imported from the European Communities in order to secure the collection of import duties whose imposition, however, had not yet been determined at the time that the increased bonding requirement was imposed. Referring to the increased bonding requirements as the "3 March Measure", the Panel stated, inter alia: "We have found that the bonding requirements should be assessed together with the rights/obligations they purport to protect, being in this case, the right to collect tariffs at bound levels. The 3 March Measure imposed additional bonding requirements to guarantee collection of 100 per cent tariff duty."(90) In contrast, the Appellate Body emphasized the distinction between the imposition of duties and the increased bonding requirements: "The task of the Panel ... was ... to examine the GATT-1994-consistency of the increased bonding requirements; the Panel's task was not to examine the GATT 1994-consistency of the imposition of 100 per cent duties.
Nevertheless, the Panel examined the GATT 1994-consistency of the increased bonding requirements in the light of the GATT 1994-consistency of the imposition of 100 per cent duties, and concluded, on the basis of this examination, that the increased bonding requirements are inconsistent with Articles II:1(a) and II:1(b), first sentence, of the GATT 1994. As the Panel had previously concluded that the imposition of 100 per cent duties and the increased bonding requirements were legally distinct measures, and that the imposition of 100 per cent duties was not in the Panel's terms of reference, the Panel could not, based on this reasoning, have come to the conclusion that the increased bonding requirements are inconsistent with Articles II:1(a) and II:1(b), first sentence, of the GATT 1994."(91) (b) Implementation in WTO Schedules of HS changes 49. On 18 July 2001, the General Council approved new procedures to introduce HS2002 changes to schedules of concessions.(92) (i) Integrated Data Base (IDB) Project 50. At its meeting on 24 June 1997, the Committee on Market Access agreed to the restructuring of the existing Integrated Data Base (IDB) from a mainframe environment to a Personal Computer (PC)-based system, which would utilize new technology to improve the operation of the IDB.(93) At its meeting of 16 July 1997, the General Council adopted the Decision on the Supply of Information to the Integrated Data Base for Personal Computers, which was approved and forwarded to the General Council by the Committee on Market Access at its meeting of 24 June 1997.(94) At its meeting of 2 December 1997, the Committee on Market Access further adopted two decisions concerning: (1) the deadlines for IDB submissions, pursuant to the decision adopted by the General Council on 16 July 1997 on the Supply of Information for the Integrated Data Base for Personal Computers, and (2) access to the IDB.(95) At its meeting on 31 May 1999, the Committee on Market Access further adopted the document entitled "Dissemination of the Integrated Data Base".(96) At its meeting of 18 December 2000, the Committee on Market Access adopted, on an ad referendum basis, the document entitled "Review of the Operation of the Integrated Data Base (IDB) and Related Technical Assistance Activities" and gave the Indian delegation until 22 January 2001 to provide comments.(97) 51. On 12 June 2002, the Committee on Market Access adopted the dissemination policy of the IDB.(98) Since then several organizations have been granted access to this database.(99) (ii) Consolidated Tariff Schedule Data Base 52. At its meeting on 22 November 1995, the Committee on Market Access agreed to the establishment of consolidated loose-leaf schedules on the basis of a proposal by the Chairman contained in document G/MA/TAR/W/4/Rev.2.(100) At its meeting on 29 November 1996, the Council for Trade in Goods adopted the Decision on the "Establishment of Consolidated Loose-Leaf Schedules".(101) Earlier, at its meeting on 18 October 1996, the Committee on Market Access had approved the Decision and had agreed to forward it to the Council for Trade in Goods for approval. 53. At its meeting on 26 March 1998, the Committee on Market Access approved the project proposal on the Consolidated Tariff Schedules (CTS) Database.(102) 54. At its meeting on 28 July 2000, the Committee on Market Access adopted the format for inclusion of agricultural commitments into the CTS database on the understanding that the database has no legal basis and that the data contained therein would be available to all delegations at the same time.(103) 55. On 12 June 2002, the Committee on Market Access adopted the dissemination policy of the CTS database.(104) Several organizations have been granted access to this database.(105) (iii) Review of the Understanding on the Interpretation of Article XXVIII of GATT 1994 56. With respect to the review by the Committee of the Understanding on the Interpretation of Article XXVIII of GATT 1994, see paragraph 650 below. (d) Information technology products (i) The Ministerial Declaration on Trade in Information Technology Products 57. In December 1996, the Singapore Ministerial Conference adopted the Ministerial Declaration on Trade in Information Technology Products.(106) The Declaration, initially agreed by 29 Members (including the 15 EC member States) and States or separate customs territories in the process of WTO accession, called on its participants to: "[B]ind and eliminate customs duties and other duties and charges of any kind, within the meaning of Article II:1(b) of the General Agreement on Tariffs and Trade 1994, with respect to the following:
'(a) all products classified (or classifiable) with Harmonized System (1996) ('HS') headings listed in Attachment A to the Annex to this Declaration; and
(b) all products specified in Attachment B to the Annex to this Declaration, whether or not they are included in Attachment A;'
through equal rate reductions of customs duties beginning in 1997 and concluding in 2000, recognizing that extended staging of reductions and, before implementation, expansion of product coverage may be necessary in limited circumstances."(107) 58. As of 31 December 2002, there were 42 participants (covering 57 Members and States or separate customs territories in the process of acceding to the WTO) representing approximately 93 per cent of world trade in information technology products.(108) (ii) The Committee of Participants on the Expansion of Trade in Information Technology Products 59. On 26 March 1997, the Participants established the Committee of Participants on the Expansion of Trade in Information Technology Products in order to monitor the provisions of paragraphs 3, 5, 6 and 7 of the Annex to the Declaration.(109) 60. At its meeting of 30 October 1997, the Committee of Participants adopted rules of procedure which are similar to those of other WTO bodies.(110) 61. At its meeting of 26 October 2000, the Committee of Participants agreed, on an ad referendum basis, to a Non-Tariff Measures Work Programme, subject to further consultations with capitals by 10 November 2000. Since no comments were received by this date, the Work Programme was deemed approved and issued as a formal document.(111) (a) Article II:1(b) First sentence (i) "subject to the terms, conditions or qualifications set forth" 62. In EC - Bananas III, addressing the question as to whether the allocation of tariff quotas as inscribed in a Schedule was inconsistent with GATT Article XIII, the Appellate Body addressed the legal status of tariff concessions. The Appellate Body held that "a Member may yield rights and grant benefits, but it cannot diminish its obligations": "With respect to concessions contained in the Schedules annexed to the GATT 1947, the panel in United States - Restrictions on Importation of Sugar ("United States - Sugar Headnote") found that:
'... Article II permits contracting parties to incorporate into their Schedules acts yielding rights under the General Agreement but not acts diminishing obligations under that Agreement.'(112)
This principle is equally valid for the market access concessions and commitments for agricultural products contained in the Schedules annexed to the GATT 1994. The ordinary meaning of the term 'concessions' suggests that a Member may yield rights and grant benefits, but it cannot diminish its obligations. This interpretation is confirmed by paragraph 3 of the Marrakesh Protocol, which provides:
'The implementation of the concessions and commitments contained in the schedules annexed to this Protocol shall, upon request, be subject to multilateral examination by the Members. This would be without prejudice to the rights and obligations of Members under Agreements in Annex 1A of the WTO Agreement. (emphasis added)'"(113) 63. In EC - Poultry, the Appellate Body rejected Brazil's argument that the MFN principle in Articles I and XIII of GATT 1994 does not necessarily apply to tariff-rate quotas resulting from compensation negotiations under Article XXVIII of GATT 1994. In so doing, the Appellate Body confirmed its finding in EC - Bananas III, cited in paragraph 62 above, and again referred to paragraph 3 of the Marrakesh Protocol. The Appellate Body stated: "In United States - Restrictions on Imports of Sugar(114) the panel stated that Article II of the GATT permits contracting parties to incorporate into their Schedules acts yielding rights under the GATT, but not acts diminishing obligations under that Agreement. In our view, this is particularly so with respect to the principle of non-discrimination in Articles I and XIII of the GATT 1994. In EC - Bananas, we confirmed the principle that a Member may yield rights but not diminish its obligations and concluded that it is equally valid for the market access concessions and commitments for agricultural products contained in the Schedules annexed to the GATT 1994.(115) The ordinary meaning of the term 'concessions' suggests that a Member may yield or waive some of its own rights and grant benefits to other Members, but that it cannot unilaterally diminish its own obligations. This interpretation is confirmed by paragraph 3 of the Marrakesh Protocol, which provides:
'The implementation of the concessions and commitments contained in the schedules annexed to this Protocol shall, upon request, be subject to multilateral examination by the Members. This would be without prejudice to the rights and obligations of Members under Agreements in Annex 1A of the WTO Agreement. (emphasis added)'"(116) 64. In Canada - Dairy, Canada's Schedule established a quota of 64,500 tons, under which imports were subject to a certain duty, while out-of-quota imports were subject to a higher duty. Under the heading "Other terms and conditions", the Canadian Schedule stated: "This quantity [64,500] represents the estimated annual cross-border purchases imported by Canadian consumers." The United States argued that Canada violated Article II:1(b) in restricting access to tariff quotas for fluid milk to cross-border imports by Canadians of (i) consumer packaged milk for personal use, (ii) valued at less than Can$20. The United States argued that with respect to those two conditions, Canada was granting imports of fluid milk treatment less favourable than that provided for in its Schedule. The Panel found the language contained in Canada's Schedule under the heading "Other terms and conditions" to be a description of the way the size of the quota was determined, rather than a statement of the conditions as to the kind of imports qualified to enter Canada under this quota. The Panel found that " ... the ordinary meaning of the word "represent" in this context does not, in our view, call to mind the setting out of specific restrictions or conditions".(117) The Panel added that "[e]ven if the phrase could be said to include restrictions on access to the tariff-rate quota, we do not see how the two conditions at issue in this dispute could be read into this phrase".(118) As a result, the Panel did not find any restriction to tariff quotas in Canada's relevant Schedule, and thus, agreed with the United States' argument.(119) The Appellate Body disagreed with the Panel's reading of the Schedule and presented the following interpretation of the term "subject to terms, conditions or qualifications" contained in Article II:1(b): "Under Article II:1(b) of the GATT 1994, the market access concessions granted by a Member are 'subject to' the 'terms, conditions or qualifications set forth in [its] Schedule'. (emphasis added) In our view, the ordinary meaning of the phrase 'subject to' is that such concessions are without prejudice to and are subordinated to, and are, therefore, qualified by, any 'terms, conditions or qualifications' inscribed in a Member's Schedule. We believe that the relationship between the 64,500 tonnes tariff-rate quota and the 'Other Terms and Conditions' set forth in Canada's Schedule is of this nature. The phrase 'terms and conditions' is a composite one which, in its ordinary meaning, denotes the imposition of qualifying restrictions or conditions. A strong presumption arises that the language which is inscribed in a Member's Schedule under the heading, 'Other Terms and Conditions', has some qualifying or limiting effect on the substantive content or scope of the concession or commitment.(120)
In interpreting the language in Canada's Schedule, the Panel focused on the verb 'represents' and opined that, because of the use of this verb, the notation was no more than a 'description' of the 'way the size of the quota was determined'.(121) The net consequence of the Panel's interpretation is a failure to give the notation in Canada's Schedule any legal effect as a 'term and condition'. If the language is merely a 'description' or a 'narration' of how the quantity was arrived at, we do not see what purpose it serves in being inscribed in the Schedule. The Panel, in other words, acted upon the assumption that Canada projected no identifiably necessary or useful qualifying or limiting purpose in inscribing the notation in its Schedule. The Panel thus disregarded the principle of effectiveness in its interpretive effort.
We note that the Panel also adopted an overly literal and narrow view of the words 'cross-border purchases imported by Canadian consumers' in the notation at issue. Moreover, the Panel erred in failing to give meaning to all of the words in that notation. On the basis of its ordinary meaning, the Panel stated that the language in the notation could not refer only to 'consumer packaged' milk 'for personal use'.(122) (emphasis in original) We do not agree that the ordinary meaning of that phrase in the notation is so unequivocal. We do not see anything in the text of the notation which necessarily precludes such an interpretation. The notation refers to 'cross-border purchases imported by Canadian consumers'. It seems, to us, that this language may well be taken to refer to imports of fluid milk made by Canadian consumers for personal use in the course of cross-border shopping."(123) 65. After making the findings referenced in paragraph 64 above, the Appellate Body in Canada - Dairy found that while the language contained in Canada's Schedule could be said to refer to the requirement of "consumer packaged milk for personal use", it could not refer to the Can$ 50 value limitation. As a result, the Appellate Body found the latter requirement not to be contained in Canada's Schedule and its existence to be inconsistent with Article II:1(b).(124) 66. In US - Certain EC Products, one of the issues was the consistency of increased bonding requirements imposed on imports with GATT Article II:1(b), first sentence. See paragraph 48 above. (ii) Interpretation of tariff concessions in a Schedule Applicable interpretative rules 67. In EC - Computer Equipment, the Appellate Body dealt with the complaint that the reclassification of certain computer equipment was in violation of the relevant tariff concession of the European Communities, and therefore inconsistent with Article II. The Appellate Body set forth the interpretative rules on tariff concessions and, contrary to the Panel which had based its interpretation of the European Communities' tariff commitments on the "legitimate expectations" of the exporting Member(125), it emphasized the common intentions of the parties: "The purpose of treaty interpretation under Article 31 of the Vienna Convention is to ascertain the common intentions of the parties. These common intentions cannot be ascertained on the basis of the subjective and unilaterally determined 'expectations' of one of the parties to a treaty. Tariff concessions provided for in a Member's Schedule - the interpretation of which is at issue here - are reciprocal and result from a mutually-advantageous negotiation between importing and exporting Members. A Schedule is made an integral part of the GATT 1994 by Article II:7 of the GATT 1994. Therefore, the concessions provided for in that Schedule are part of the terms of the treaty. As such, the only rules which may be applied in interpreting the meaning of a concession are the general rules of treaty interpretation set out in the Vienna Convention."(126) Relevance of "legitimate expectations" 68. In EC - Computer Equipment, the European Communities appealed against the Panel's finding that "the meaning of the term 'ADP machines' in this context [of Article II:1(b)] may be determined in light of the legitimate expectations of an exporting Member."(127) In addition, the Panel found that the United States "was not required to clarify the scope of the European Communities' tariff concessions".(128) In rejecting the Panel's finding, the Appellate Body stated as follows: "Tariff negotiations are a process of reciprocal demands and concessions, of 'give and take'. It is only normal that importing Members define their offers (and their ensuing obligations) in terms which suit their needs. On the other hand, exporting Members have to ensure that their corresponding rights are described in such a manner in the Schedules of importing Members that their export interests, as agreed in the negotiations, are guaranteed. There was a special arrangement made for this in the Uruguay Round. For this purpose, a process of verification of tariff schedules took place from 15 February through 25 March 1994, which allowed Uruguay Round participants to check and control, through consultations with their negotiating partners, the scope and definition of tariff concessions.(129) Indeed, the fact that Members' Schedules are an integral part of the GATT 1994 indicates that, while each Schedule represents the tariff commitments made by one Member, they represent a common agreement among all Members.
For the reasons stated above, we conclude that the Panel erred in finding that 'the United States was not required to clarify the scope of the European Communities' tariff concessions on LAN equipment'.(130) We consider that any clarification of the scope of tariff concessions that may be required during the negotiations is a task for all interested parties."(131) 69. However, despite its rejection, referenced in paragraph 68 above, of the Panel's interpretative approach to the European Communities' tariff commitments, the Appellate Body in EC - Computer Equipment stated that "[w]e do not agree that the Panel has created and applied a new rule on the burden of proof. The rules on the burden of proof are those which we clarified in United States - Shirts and Blouses.(132)"(133) The Appellate Body opined that the Panel's findings on the "requirement of clarification" were linked to the Panel's reliance on "legitimate expectations" as a means of interpretation of the European Communities' tariff concessions and "serve[d] to complete and buttress the Panel's conclusion that 'the United States was entitled to legitimate expectations that LAN equipment would continue to be accorded tariff treatment as ADP machines in the European Communities'".(134) Relevance of Harmonized System/WCO practices 70. On the relevance of the Harmonized System in interpreting tariff concessions, the Appellate Body in EC - Computer Equipment stated as follows: "We note that during the Uruguay Round negotiations, both the European Communities and the United States were parties to the Harmonized System. Furthermore, it appears to be undisputed that the Uruguay Round tariff negotiations were held on the basis of the Harmonized System's nomenclature and that requests for, and offers of, concessions were normally made in terms of this nomenclature. Neither the European Communities nor the United States argued before the Panel that the Harmonized System and its Explanatory Notes were relevant in the interpretation of the terms of Schedule LXXX. We believe, however, that a proper interpretation of Schedule LXXX should have included an examination of the Harmonized System and its Explanatory Notes."(135) 71. The Appellate Body also discussed the relevance of decisions of the World Customs Organization ("WCO") for the interpretation of the tariff concessions at issue: "A proper interpretation also would have included an examination of the existence and relevance of subsequent practice. We note that the United States referred, before the Panel, to the decisions taken by the Harmonized System Committee of the WCO in April 1997 on the classification of certain LAN equipment as ADP machines. Singapore, a third party in the panel proceedings, also referred to these decisions. The European Communities observed that it had introduced reservations with regard to these decisions and that, even if they were to become final as they stood, they would not affect the outcome of the present dispute for two reasons: first, because these decisions could not confirm that LAN equipment was classified as ADP machines in 1993 and 1994; and, second, because this dispute 'was about duty treatment and not about product classification'. We note that the United States agrees with the European Communities that this dispute is not a dispute on the correct classification of LAN equipment, but a dispute on whether the tariff treatment accorded to LAN equipment was less favourable than that provided for in Schedule LXXX. However, we consider that in interpreting the tariff concessions in Schedule LXXX, decisions of the WCO may be relevant; and, therefore, they should have been examined by the Panel."(136) Relevance of prior practice in tariff classification 72. In EC - Computer Equipment, in its interpretation of the tariff concessions at issue, the Appellate Body found that the terms of the relevant Schedule were ambiguous. In continuing its analysis, the Appellate Body discussed the relevance of tariff classification practice of Members to the interpretation of tariff concessions as follows: "In the light of our observations on 'the circumstances of [the] conclusion' of a treaty as a supplementary means of interpretation under Article 32 of the Vienna Convention, we consider that the classification practice in the European Communities during the Uruguay Round is part of 'the circumstances of [the] conclusion' of the WTO Agreement and may be used as a supplementary means of interpretation within the meaning of Article 32 of the Vienna Convention".(137) 73. However, the Appellate Body added the following caveat regarding the relevance of prior practice on tariff classification: "The purpose of treaty interpretation is to establish the common intention of the parties to the treaty. To establish this intention, the prior practice of only one of the parties may be relevant, but it is clearly of more limited value than the practice of all parties. In the specific case of the interpretation of a tariff concession in a Schedule, the classification practice of the importing Member, in fact, may be of great importance."(138) 74. Also, the Appellate Body in EC - Computer Equipment denied the relevance of inconsistent practice for the interpretation of tariff concessions. In addition, the Appellate Body pointed to the fact that the Panel on EC - Computer Equipment had focused on only two member States of the European Communities: "Consistent prior classification practice may often be significant. Inconsistent classification practice, however, cannot be relevant in interpreting the meaning of a tariff concession. ...
... [T]he Panel identified Ireland and the United Kingdom as the 'largest' and 'major' market for LAN equipment exported from the United States. On the basis of this assumption, the Panel gave special importance to the classification practice by customs authorities in these two Member States. However, the European Communities constitutes a customs union, and as such, once goods are imported into any Member State, they circulate freely within the territory of the entire customs union. The export market, therefore, is the European Communities, not an individual Member State."(139) (iii) "ordinary customs duties" 75. As regards the concept of ordinary customs duty, the Appellate Body in Chile - Price Band System, reversed the Panel's interpretation of this concept with respect to Article 4 of the Agreement on Agriculture and Article II.1(b) first sentence of GATT 1994. See paragraphs 24-28 of the Chapter on the Agreement on Agriculture. Specific import duties under tariff concessions made on an ad valorem basis 76. In Argentina - Textiles and Apparel, the measure at issue was a minimum specific import duty (the so-called "DIEM") imposed by Argentina on footwear, textiles and apparel. Argentina's Schedule included a bound rate of duty of 35 per cent ad valorem with respect to the above-mentioned goods. In practice, textiles and apparel were subject to the higher of either (i) a 35 per cent ad valorem duty or (ii) the minimum specific duty. The Panel found the Argentine specific duty to be a violation of Article II for two reasons: First, the Panel found that Argentina had acted inconsistently with Article II simply by virtue of applying a different type of import duty than set out in its Schedule, independently of whether the ad valorem equivalent of the specific duty in fact exceeded the bound ad valorem rate.(140) In making this finding, the Panel relied on past GATT practice which it found to be "clear".(141) Second, the Panel found a violation of Article II in the fact that the minimum specific import duty in certain cases exceeded the bound 35 per cent ad valorem duty.(142) The Appellate Body modified the findings of the Panel. In so doing, the Appellate Body disagreed with the Panel about the clarity of past GATT practice and focused, in its analysis, on the terms of Article II. The Appellate Body first addressed the Panel's finding that merely by applying a type of duty different from the type provided for in a Member's Schedule, that Member acted inconsistently with Article II: "A tariff binding in a Member's Schedule provides an upper limit on the amount of duty that may be imposed, and a Member is permitted to impose a duty that is less than that provided for in its Schedule. The principal obligation in the first sentence of Article II:1(b), as we have noted above, requires a Member to refrain from imposing ordinary customs duties in excess of those provided for in that Member's Schedule. However, the text of Article II:1(b), first sentence, does not address whether applying a type of duty different from the type provided for in a Member's Schedule is inconsistent, in itself, with that provision."(143) 77. After finding that the text of Article II:1(b) did not address the question whether a violation of Article II could result merely from the application a type of duty different from the type of duty provided for in a Member's Schedule, the Appellate Body addressed the question whether Argentina had applied customs duties in excess of those provided for in its Schedule: "[T]he application of a type of duty different from the type provided for in a Member's Schedule is inconsistent with Article II:1(b), first sentence, of the GATT 1994 to the extent that it results in ordinary customs duties being levied in excess of those provided for in that Member's Schedule. In this case, we find that Argentina has acted inconsistently with its obligations under Article II:1(b), first sentence, of the GATT 1994, because the DIEM regime, by its structure and design, results, with respect to a certain range of import prices in any relevant tariff category to which it applies, in the levying of customs duties in excess of the bound rate of 35 per cent ad valorem in Argentina's Schedule."(144) 78. In reaching this conclusion, the Appellate Body pointed out the possibility of a price sufficiently low to render the ad valorem equivalent of the DIEM greater than 35 per cent: "[W]e may generalize that under the Argentine system, whether the amount of the DIEM is determined by applying 35 per cent, or a rate less than 35 per cent, to the representative international price, there will remain the possibility of a price that is sufficiently low to produce an ad valorem equivalent of the DIEM that is greater than 35 per cent. In other words, the structure and design of the Argentine system is such that for any DIEM, no matter what ad valorem rate is used as the multiplier of the representative international price, the possibility remains that there is a 'break-even' price below which the ad valorem equivalent of the customs duty collected is in excess of the bound ad valorem rate of 35 per cent.
We note that it is possible, under certain circumstances, for a Member to design a legislative 'ceiling' or 'cap' on the level of duty applied which would ensure that, even if the type of duty applied differs from the type provided for in that Member's Schedule, the ad valorem equivalents of the duties actually applied would not exceed the ad valorem duties provided for in the Member's Schedule. However, no such "ceiling" exists in this case. The measures at issue here, as we have already noted, specifically and expressly require Argentine customs officials to collect the greater of the ad valorem or the specific duties applicable, with no upper limit on the level of the ad valorem equivalent of the specific duty that may be imposed. Before the Panel, Argentina argued that its domestic challenge procedure (recurso de impugnación), in combination with the precedence and direct effect of international treaty obligations in the Argentine national legal system, operated as an effective legislative 'ceiling' to ensure that a duty in excess of the bound rate of 35 per cent ad valorem could never actually be imposed. The Panel did not accept this argument, and Argentina has not appealed from that finding of the Panel. In this case, therefore, there is no effective legislative 'ceiling' in the Argentine system which ensures that duties in excess of the bound rate of 35 per cent ad valorem will not be applied."(145) (b) Article II:1(b) Second sentence 79. The Appellate Body in Chile - Price Band System reversed the Panel's finding that the duties resulting from Chile's price band system constituted a violation of the second sentence of Article II:1(b) on the grounds that the Panel acted inconsistently with Article 11 of the DSU.(146) See paragraphs 243 and 247 of the Chapter on the DSU. 80. The Appellate Body in Chile - Price Band System, in examining the concept of ordinary customs duties under Article 4.2 of the Agreement on Agriculture, referred to Article II:1(b) second sentence of the GATT 1994. See paragraphs 24-28 of the Chapter on the Agreement on Agriculture.. 3. Relationship between paragraphs 1(a) and 1(b) 81. In Argentina - Textiles and Apparel, in addressing the consistency with GATT Article II of certain minimum specific duties imposed on textiles and apparel, the Appellate Body described the relationship between paragraphs (a) and (b) of Article II:1 as follows: "The terms of Article II:1(a) require that a Member 'accord to the commerce of the other Members treatment no less favourable than that provided for' in that Member's Schedule. Article II:1(b), first sentence, states, in part: 'The products described in Part I of the Schedule ... shall, on their importation into the territory to which the Schedule relates, ... be exempt from ordinary customs duties in excess of those set forth and provided therein.' Paragraph (a) of Article II:1 contains a general prohibition against according treatment less favourable to imports than that provided for in a Member's Schedule. Paragraph (b) prohibits a specific kind of practice that will always be inconsistent with paragraph (a): that is, the application of ordinary customs duties in excess of those provided for in the Schedule. Because the language of Article II:1(b), first sentence, is more specific and germane to the case at hand, our interpretative analysis begins with, and focuses on, that provision."(147) 82. In EC - Computer Equipment, the Appellate Body rejected the Panel's finding that Article II:5 confirmed the relevance of "legitimate expectations" of the exporting Member for interpreting tariff concessions of the importing Member: "[W]e reject the Panel's view that Article II:5 of the GATT 1994 confirms that 'legitimate expectations are a vital element in the interpretation' of Article II:1 of the GATT 1994 and of Members' Schedules. It is clear from the wording of Article II:5 that it does not support the Panel's view. This paragraph recognizes the possibility that the treatment contemplated in a concession, provided for in a Member's Schedule, on a particular product, may differ from the treatment accorded to that product and provides for a compensatory mechanism to rebalance the concessions between the two Members concerned in such a situation. However, nothing in Article II:5 suggests that the expectations of only the exporting Member can be the basis for interpreting a concession in a Member's Schedule for the purposes of determining whether that Member has acted consistently with its obligations under Article II:1. In discussing Article II:5, the Panel overlooked the second sentence of that provision, which clarifies that the 'contemplated treatment' referred to in that provision is the treatment contemplated by both Members."(148) 83. In EC - Computer Equipment, the Appellate Body considered that "[a] Schedule is made an integral part of the GATT 1994 by Article II:7 of the GATT 1994". The Appellate Body thus concluded that "the concessions provided for in that Schedule are part of the terms of the treaty".(149) In this regard, see paragraph 67 above.
84. In EC - Bananas III, the Appellate Body, discussing whether tariff concessions for agricultural products can deviate from Article XIII of GATT 1994, emphasized that in their Schedules, Members may yield their rights, but may not diminish their obligations under GATT 1994. See paragraph 62 above. 85. In EC - Bananas III, the Appellate Body rejected the argument that Article III:4 of the GATT 1994 did not cover the EC licensing system for the allocation of tariff quotas for imports of bananas because it was a border measure. See paragraphs 103 and 261 below. 86. In Korea - Various Measures on Beef, after finding that the practice of the Korean state trading agency for beef of treating grass-fed beef and grain-fed beef differently was inconsistent with GATT Articles XI and II:1(a), the Panel, in a finding not reviewed by the Appellate Body, did not "find it necessary to address Australia's claims that the same measures also violate Articles III:4 and XVII of GATT."(150) 87. The majority of the Panel on US - Certain EC Products decided that the United States' bonding requirements on imports from the European Communities fell within the scope of Article II of GATT 1994; in a separate opinion, one panelist, whose identity remained confidential pursuant to Article 14.3 of the DSU, expressed the view that the increased bonding requirement was subject to, and inconsistent with, Article XI. The Appellate Body reversed the finding of the Panel. See paragraph 48 above, and footnote 90. 88. Following the finding referenced in paragraph 84 above, the Appellate Body in EC - Bananas III addressed whether the Agreement on Agriculture permits market access concessions on agricultural products to be inconsistent with Article XIII of GATT 1994. In so doing, the Appellate Body addressed the relationship between the Agreement on Agriculture and GATT 1994 and found that Article XIII of GATT 1994 was applicable to such concessions: "The question remains whether the provisions of the Agreement on Agriculture allow market access concessions on agricultural products to deviate from Article XIII of the GATT 1994. The preamble of the Agreement on Agriculture states that it establishes 'a basis for initiating a process of reform of trade in agriculture' and that this reform process 'should be initiated through the negotiation of commitments on support and protection and through the establishment of strengthened and more operationally effective GATT rules and disciplines'. The relationship between the provisions of the GATT 1994 and of the Agreement on Agriculture is set out in Article 21.1 of the Agreement on Agriculture:
'The provisions of GATT 1994 and of other Multilateral Trade Agreements in Annex 1A to the WTO Agreement shall apply subject to the provisions of this Agreement.'
Therefore, the provisions of the GATT 1994, including Article XIII, apply to market access commitments concerning agricultural products, except to the extent that the Agreement on Agriculture contains specific provisions dealing specifically with the same matter."(151) 89. In EC - Bananas III, the Panel also found that the European Communities' import regime for bananas was inconsistent with Article XIII of GATT 1994 in that the European Communities allocated tariff quota shares to some Members without allocating such shares to other Members. In doing so, with respect to the relationship between Articles II and XIII, the Panel stated as follows: "The panel in the Sugar Headnote case found that qualifications on tariff bindings do not override other GATT provisions after an analysis of the wording of Article II, its object, purpose and context, and the drafting history of the provision. Although it made no mention of the Vienna Convention, it seems to have followed closely Articles 31 and 32 thereof. ...(152) ... We agree with the analysis of the Sugar Headnote panel report and note that Article II was not changed in any relevant way as a result of the Uruguay Round. Thus, based on the Sugar Headnote case, we conclude that the EC's inclusion of allocations inconsistent with the requirements of Article XIII in its Schedule does not prevent them from being challenged by other Members. We note in this regard that the Uruguay Round tariff schedules were prepared with full knowledge of the Sugar Headnote panel report, which was adopted by the GATT CONTRACTING PARTIES in the middle of the Round (June 1989)."(153) 90. In Korea - Various Measures on Beef, after finding that the practice of the Korean state trading agency for beef of treating grass-fed beef and grain-fed beef differently was inconsistent with GATT Articles XI and II:1(a), the Panel, in a finding not reviewed by the Appellate Body, did not "find it necessary to address Australia's claims that the same measures also violate Article XVII of GATT".(154) 91. A number of waivers of a "collective" or individual nature have been granted to enable Members to implement the HS changes domestically and undertake Article XXVIII negotiations, subsequently, if required. With respect to these waivers, see Chapter on the WTO Agreement, paragraph 283-288.
92. The Appellate Body in Chile - Price Band System, in examining the concept of ordinary customs duties under Article 4.2 of the Agreement on Agriculture, referred to Article II:1(b) of GATT 1994. See paragraphs 25-31 of the Chapter on the Agreement on Agriculture. The Appellate Body also indicated that if it were to find that Chile's price band system was inconsistent with Article 4.2 of the Agreement of Agriculture, it would not need to make a separate finding on whether Chile's price band system also results in a violation of Article II:1(b) of the GATT 1994 to resolve this dispute.(155) 93. In Canada - Dairy, the Panel decided not to examine a claim that Canada violated Article 3 of the Licensing Agreement in that it restricted access to tariff-rate quotas for imports of fluid milk to Canadians of consumer packaged milk for personal use, valued less than Can$20, after having found the Canadian measure inconsistent with GATT Article II:1(b) (see paragraph 64 above).(156) See Chapter on Licensing Agreement, paragraph 33. Part II II. Article III back to top Article III*: National Treatment on Internal Taxation and Regulation 1. The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.*
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.*
3. With respect to any existing internal tax which is inconsistent with the provisions of paragraph 2, but which is specifically authorized under a trade agreement, in force on April 10, 1947, in which the import duty on the taxed product is bound against increase, the contracting party imposing the tax shall be free to postpone the application of the provisions of paragraph 2 to such tax until such time as it can obtain release from the obligations of such trade agreement in order to permit the increase of such duty to the extent necessary to compensate for the elimination of the protective element of the tax.
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.
5. No contracting party shall establish or maintain any internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions which requires, directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources. Moreover, no contracting party shall otherwise apply internal quantitative regulations in a manner contrary to the principles set forth in paragraph 1.*
6. The provisions of paragraph 5 shall not apply to any internal quantitative regulation in force in the territory of any contracting party on July 1, 1939, April 10, 1947, or March 24, 1948, at the option of that contracting party; Provided that any such regulation which is contrary to the provisions of paragraph 5 shall not be modified to the detriment of imports and shall be treated as a customs duty for the purpose of negotiation.
7. No internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions shall be applied in such a manner as to allocate any such amount or proportion among external sources of supply.
8. (a) The provisions of this Article shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale.
(b) The provisions of this Article shall not prevent the payment of subsidies exclusively to domestic producers, including payments to domestic producers derived from the proceeds of internal taxes or charges applied consistently with the provisions of this Article and subsidies effected through governmental purchases of domestic products.
9. The contracting parties recognize that internal maximum price control measures, even though conforming to the other provisions of this Article, can have effects prejudicial to the interests of contracting parties supplying imported products. Accordingly, contracting parties applying such measures shall take account of the interests of exporting contracting parties with a view to avoiding to the fullest practicable extent such prejudicial effects.
10. The provisions of this Article shall not prevent any contracting party from establishing or maintaining internal quantitative regulations relating to exposed cinematograph films and meeting the requirements of Article IV. Ad Article III Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred to in paragraph 1 which applies to an imported product and to the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation, is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly subject to the provisions of Article III. Paragraph 1 The application of paragraph 1 to internal taxes imposed by local governments and authorities with the territory of a contracting party is subject to the provisions of the final paragraph of Article XXIV. The term "reasonable measures" in the last-mentioned paragraph would not require, for example, the repeal of existing national legislation authorizing local governments to impose internal taxes which, although technically inconsistent with the letter of Article III, are not in fact inconsistent with its spirit, if such repeal would result in a serious financial hardship for the local governments or authorities concerned. With regard to taxation by local governments or authorities which is inconsistent with both the letter and spirit of Article III, the term "reasonable measures" would permit a contracting party to eliminate the inconsistent taxation gradually over a transition period, if abrupt action would create serious administrative and financial difficulties. Paragraph 2 A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed. Paragraph 5 Regulations consistent with the provisions of the first sentence of paragraph 5 shall not be considered to be contrary to the provisions of the second sentence in any case in which all of the products subject to the regulations are produced domestically in substantial quantities. A regulation cannot be justified as being consistent with the provisions of the second sentence on the ground that the proportion or amount allocated to each of the products which are the subject of the regulation constitutes an equitable relationship between imported and domestic products.
(i) Avoidance of protectionism in the application of internal measures 94. In examining the consistency of the Japanese taxation on liquor products with Article III, the Appellate Body in Japan - Alcoholic Beverages II explained the purpose of Article III in the following terms: "The broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Article III 'is to ensure that internal measures "not be applied to imported or domestic products so as to afford protection to domestic production'".(157) Toward this end, Article III obliges Members of the WTO to provide equality of competitive conditions for imported products in relation to domestic products.(158) '[T]he intention of the drafters of the Agreement was clearly to treat the imported products in the same way as the like domestic products once they had been cleared through customs. Otherwise indirect protection could be given'(159).(160)" 95. The Appellate Body repeatedly cited its finding referenced in paragraph 94 above.(161) Further, in Korea - Alcoholic Beverages, the Appellate Body added: "In view of the objectives of avoiding protectionism, requiring equality of competitive conditions and protecting expectations of equal competitive relationships, we decline to take a static view of the term 'directly competitive or substitutable.'"(162) 96. Also, in Canada - Periodicals, the Appellate Body added: "The fundamental purpose of Article III of the GATT 1994 is to ensure equality of competitive conditions between imported and like domestic products.(163)"(164) 97. In Argentina - Hides and Leather, the Panel referred to the findings of the Appellate Body referenced in paragraphs 94-96 above, and stated that "Article III:2, first sentence, is not concerned with taxes or changes as such or the policy purposes Members pursue with them, but with their economic impact on the competitive opportunities of imported and like domestic products."(165) See also paragraph 154 below. (ii) Protection of tariff commitments under Article III/Relevance of tariff concessions 98. In Japan - Alcoholic Beverages II, the Panel held that "one of the main purposes of Article III is to guarantee that WTO Members will not undermine through internal measures their commitments under Article II."(166) Although the Appellate Body agreed about the significance of Article III with respect to tariff concessions, it emphasized that the purpose of Article III was broader: "The broad purpose of Article III of avoiding protectionism must be remembered when considering the relationship between Article III and other provisions of the WTO Agreement. Although the protection of negotiated tariff concessions is certainly one purpose of Article III, the statement in Paragraph 6.13 of the Panel Report that 'one of the main purposes of Article III is to guarantee that WTO Members will not undermine through internal measures their commitments under Article II' should not be overemphasized. The sheltering scope of Article III is not limited to products that are the subject of tariff concessions under Article II. The Article III 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. This obligation clearly extends also to products not bound under Article II. This is confirmed by the negotiating history of Article III."(167) (iii) Comparison with competition law 99. In Korea - Alcoholic Beverages, the Panel, in a statement subsequently not addressed by the Appellate Body, considered that it is not necessary to use the same criteria for defining markets under Article III:2 as under competition law. The Panel stated: "While the specifics of the interaction between trade and competition law are still being developed, we concur that the market definitions need not be the same. Trade law generally, and Article III in particular, focuses on the promotion of economic opportunities for importers through the elimination of discriminatory governmental measures which impair fair international trade. Thus, trade law addresses the issue of the potentiality to compete. Antitrust law generally focuses on firms' practices or structural modifications which may prevent or restrain or eliminate competition. It is not illogical that markets be defined more broadly when implementing laws primarily designed to protect competitive opportunities than when implementing laws designed to protect the actual mechanisms of competition. In our view, it can thus be appropriate to utilize a broader concept of markets with respect to Article III:2, second sentence, than is used in antitrust law. We also take note of the developments under European Community law in this regard. For instance, under Article 95 of the Treaty of Rome, which is based on the language of Article III, distilled alcoholic beverages have been considered similar or competitive in a series of rulings by the European Court of Justice ('ECJ').(168) On the other hand, in examining a merger under the European Merger Regulation,(169) the Commission of the European Communities found that whisky constituted a separate market.(170) Similarly, in an Article 95 case, bananas were considered in competition with other fruits.(171) However, under EC competition law, bananas constituted a distinct product market.(172) We are mindful that the Treaty of Rome is different in scope and purpose from the General Agreement, the similarity of Article 95 and Article III, notwithstanding. Nonetheless, we observe that there is relevance in examining how the ECJ has defined markets in similar situations to assist in understanding the relationship between the analysis of non-discrimination provisions and competition law.(173)"(174) (iv) Reference to GATT practice 100. With respect to GATT practice on this subject-matter, see GATT Analytical Index, pages 125-127. (b) Scope of application - measures imposed at the time or point of importation 101. In Argentina - Hides and Leather, the Panel addressed the question whether Argentine fiscal provisions concerning pre-payment of a value added tax, applied to imported goods at the time of their importation, were nevertheless to be considered "internal measures" within the meaning of Article III:2. The Panel addressed in particular Note Ad Article III, which sets forth that a measure applied to a product at the time of importation is nevertheless an internal measure within the meaning of Article III if this measure is also imposed on the like domestic product: "RG 3431 [the value-added tax measure applicable to imported goods] applies to definitive import transactions, but only if the products imported are subsequently re-sold in the internal Argentinean market. In other words, RG 3431 provides for the pre-payment of the IVA chargeable to an internal transaction. It should also be pointed out that the fact that RG 3431 is collected at the time and point of importation does not preclude it from qualifying as an internal tax measure."(175) 102. While the parties to the Argentina - Hides and Leather dispute agreed that RG 3543, another Argentine tax measure imposing a collection regime of income taxes with respect to import transactions, was an internal measure within the meaning of Article III, they disagreed with respect to the question whether the same tax regime existed for domestic goods, i.e. whether RG 2784, the income tax measure applicable with respect to domestic transactions, was the "internal analogue" of RG 3431. While RG 3543 established a collection regime and defined the purchaser as the taxable person, RG 2784 established a withholding regime and defined the seller as the taxable person. The Panel did not consider these differences significant enough for the Argentine regime to fall outside the scope the Note Ad Article III: "[I]t is clear that the fact that RG 3543 creates a collection regime and not a withholding regime does not establish, in itself, that RG 2784 is not equivalent to RG 3543. The use of a different method of taxation may be justified by objective reasons. In this regard, it seems logical to us to collect pre-payments of an income tax from the sellers of a product, as indeed RG 2784 envisages. As we understand it, RG 3543 does not do so, inter alia, because foreign sellers are not normally subject to income taxation in Argentina. In those circumstances, Argentina apparently saw fit to adjust for the adverse competitive effect of RG 2784 on domestic products by collecting pre-payments from importers in accordance with RG 3543. ... For these reasons, we find that RG 3543 establishes a mechanism for the collection of the IG at the border which is equivalent in nature to the IG withholding mechanism established by RG 2784. In accordance with the Note Ad Article III, we therefore conclude that RG 3543 is an internal measure within the meaning of Article III:2."(176) 103. In EC - Bananas III, the Appellate Body found the EC import licensing system for bananas inconsistent with Article III:4. The European Communities claimed that Article III:4 was not applicable to the import licensing system because it was a border measure. The Appellate Body replied as follows: "At issue in this appeal is not whether any import licensing requirement, as such, is within the scope of Article III:4, but whether the EC procedures and requirements for the distribution of import licences for imported bananas among eligible operators within the European Communities are within the scope of this provision. The EC licensing procedures and requirements include the operator category rules, under which 30 per cent of the import licences for third-country and non-traditional ACP bananas are allocated to operators that market EC or traditional ACP bananas, and the activity function rules, under which Category A and B licences are distributed among operators on the basis of their economic activities as importers, customs clearers or ripeners. These rules go far beyond the mere import licence requirements needed to administer the tariff quota for third-country and non-traditional ACP bananas or Lomé Convention requirements for the importation of bananas. These rules are intended, among other things, to cross-subsidize distributors of EC (and ACP) bananas and to ensure that EC banana ripeners obtain a share of the quota rents. As such, these rules affect 'the internal sale, offering for sale, purchase, ...' within the meaning of Article III:4, and therefore fall within the scope of this provision. Therefore, we agree with the conclusion of the Panel on this point."(177) 104. In Korea - Various Measures on Beef, the Panel recognized that where a state trading enterprises has a monopoly over both importation and distribution of goods, a blurring may occur of the traditional distinction between measures affecting imported products and measures affecting importation: "Based on the panel findings in the Canada - Marketing Agencies (1988) case, the Panel considers that to the extent that LPMO fully controls both the importation and distribution of its 30 per cent share of Korean beef quota, the distinction normally made in the GATT between restrictions affecting the importation of products (i.e. border measures) and restrictions affecting imported products (i.e. internal measures) loses much of its significance."(178) (ii) Reference to GATT practice 105. With respect to GATT practice on this subject-matter, see GATT Analytical Index, pages 136-139. (c) Relevance of policy purpose of internal measures / "aims-and-effects" test 106. With respect to the relevance of policy purposes of subject internal measures, in Japan - Alcoholic Beverages II, the Appellate Body stated as follows: "Members of the WTO are free to pursue their own domestic goals through internal taxation or regulation so long as they do not do so in a way that violates Article III or any of the other commitments they have made in the WTO Agreement."(179) 107. In this respect, in Argentina - Hides and Leather, the Panel stated that "[i]t must be stated ... that the applicability of Article III:2 is not conditional upon the policy purpose of a tax measure.(180)"(181) See also paragraph 97 above. 108. In Japan - Alcoholic Beverages II, the Panel, in a finding subsequently upheld by the Appellate Body, explicitly rejected the so-called "aims-and-effects" test. The Panel summarized the parties' arguments for the "aims-and-effects" test as follows: "Japan ... essentially argued that the Panel should examine the contested legislation in the light of its aim and effect in order to determine whether or not it is consistent with Article III:2. According to this view, in case the aim and effect of the contested legislation do not operate so as to afford protection to domestic production, no inconsistency with Article III:2 can be established. ... [T]he United States ... essentially argued that, in determining whether two products that were taxed differently under a Member's origin-neutral tax measure were nonetheless 'like products' for the purposes of Article III:2, the Panel should examine not only the similarity in physical characteristics and end-uses, consumer tastes and preferences, and tariff classifications for each product, but also whether the tax distinction in question was 'applied ... so as to afford protection to domestic production': that is, whether the aim and effect of that distinction, considered as a whole, was to afford protection to domestic production. According to this view, if the tax distinction in question is not being applied so as to afford protection to domestic production, the products between which the distinction is drawn are not to be deemed 'like products' for the purpose of Article III:2."(182) 109. In upholding the rejection by the Panel of the "aims-and-effects" test under Article III:2, first sentence, the Appellate Body, in Japan - Alcoholic Beverages II, found that the policy purpose of a tax measure (the "aim" of a measure") was not relevant for the purpose of Article III:2, first sentence: "Article III:2, first sentence does not refer specifically to Article III:1. There is no specific invocation in this first sentence of the general principle in Article III:1 that admonishes Members of the WTO not to apply measures 'so as to afford protection'. This omission must have some meaning. We believe the meaning is simply that the presence of a protective application need not be established separately from the specific requirements that are included in the first sentence in order to show that a tax measure is inconsistent with the general principle set out in the first sentence. However, this does not mean that the general principle of Article III:1 does not apply to this sentence. To the contrary, we believe the first sentence of Article III:2 is, in effect, an application of this general principle. ... If the imported and domestic products are 'like products', and if the taxes applied to the imported products are 'in excess of' those applied to the domestic like products, then the measure is inconsistent with Article III:2, first sentence."(183) 110. Also, in EC - Bananas III, the Appellate Body rejected the "aims-and-effects" test under both Article II and Article XVII of the GATS.(184) See Chapter on GATS, paragraph 63. 111. With respect to this topic, see also paragraph 197 below. (i) Reference to GATT practice 112. With respect to GATT practice on this subject-matter, see GATT Analytical Index, page 127. (d) Relevance of trade effects 113. In Japan - Alcoholic Beverages II, the Appellate Body addressed the relevance of the trade effects of measures falling under the scope of Article III: "[I]t 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.(185)"(186) 114. The Appellate Body reiterated this approach in Canada - Periodicals: "It is a well-established principle that the trade effects of a difference in tax treatment between imported and domestic products do not have to be demonstrated for a measure to be found to be inconsistent with Article III.(187)"(188) (i) Reference to GATT practice 115. With respect to GATT practice on this subject-matter, see GATT Analytical Index, pages 128-130. 116. In Korea - Various Measures on Beef, the Panel addressed the relationship between Article XVII, the provision on state trading enterprises, and Article III. Finding support for its conclusions in GATT practice, the Panel held: "Article XVII.1(a) establishes the general obligation on state trading enterprises to undertake their activities in accordance with the GATT principles of non-discrimination. The Panel considers that this general principle of non-discrimination includes at least the provisions of Articles I and III of GATT. ... ... A conclusion that the principle of non-discrimination was violated would suffice to prove a violation of Article XVII."(189) (i) Reference to GATT practice 117. With respect to GATT practice on this subject-matter, see also GATT Analytical Index, pages 131-133. (a) Relationship between paragraph 1 and paragraphs 2, 4 and 5 118. In US - Gasoline, in a finding subsequently not addressed by the Appellate Body, the Panel examined whether a US gasoline regulation treated imported gasoline in a manner inconsistent with Article III:1. In response to the US argument that Article III:1 "could not form the basis of a violation"(190), the Panel answered as follows: "The Panel examined first whether, after making a finding of inconsistency with Article III:4, it should make a finding under Article III:1. The Panel noted that the panel in the Malt Beverages case had examined a claim made under paragraphs 1, 2 and 4 of Article III. That panel had concluded that 'because Article III:1 is a more general provision than either Article III:2 or III:4, it would not be appropriate for the Panel to consider [the complainant's] Article III:1 allegations to the extent that the Panel were to find [the respondent's] measures to be inconsistent with the more specific provisions of Articles III:2 and III:4.'(191) The present Panel agreed with this reasoning, and therefore did not find it necessary to examine the consistency of the Gasoline Rule with Article III:1."(192) 119. In Japan - Alcoholic Beverages II, the Appellate Body examined the Panel's finding of inconsistency of the Japanese Liquor Tax Law with both sentences of Article III:2. With respect to the legal status of Article III:1, the Appellate Body invoked the principle of effective treaty interpretation and found that Article III:1 constitutes part of the context for Article III:2: "The terms of Article III must be given their ordinary meaning - in their context and in the light of the overall object and purpose of the WTO Agreement. Thus, the words actually used in the Article provide the basis for an interpretation that must give meaning and effect to all its terms. The proper interpretation of the Article is, first of all, a textual interpretation. Consequently, the Panel is correct in seeing a distinction between Article III:1, which 'contains general principles', and Article III:2, which 'provides for specific obligations regarding internal taxes and internal charges'. Article III:1 articulates a general principle that internal measures should not be applied so as to afford protection to domestic production. This general principle informs the rest of Article III. 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. In short, Article III:1 constitutes part of the context of Article III:2, in the same way that it constitutes part of the context of each of the other paragraphs in Article III. Any other reading of Article III would have the effect of rendering the words of Article III:1 meaningless, thereby violating the fundamental principle of effectiveness in treaty interpretation. Consistent with this principle of effectiveness, and with the textual differences in the two sentences, we believe that Article III:1 informs the first sentence and the second sentence of Article III:2 in different ways."(193) 120. In EC - Asbestos, the Appellate Body, in interpreting Article III:4 by comparing its terms with the terms used in Article III:2, referred to Article III:1. See paragraph 212 below. 121. The precise significance of Article III:1 for the interpretation of Article III:2, first sentence, was also addressed by the Panels on Argentina - Hides and Leather. See paragraph 132 below.(194) (i) Reference to GATT practice 122. With respect to GATT practice on this subject-matter, see also GATT Analytical Index, pages 139-140. (i) General distinction between first and second sentences 123. In Japan - Alcoholic Beverages II, the Appellate Body described the distinction between the first and second sentences of Article III:2 as follows: "[T]he second sentence of Article III:2 provides for a separate and distinctive consideration of the protective aspect of a measure in examining its application to a broader category of products that are not 'like products' as contemplated by the first sentence ...".(195) 124. In Canada - Periodicals, the Appellate Body, in reviewing the Panel's finding that the Canadian excise tax on magazines was inconsistent with Article III:2, first sentence, also addressed the distinction between the first and second sentence of Article III:2 : "[T]here are two questions which need to be answered to determine whether there is a violation of Article III:2 of the GATT 1994: (a) whether imported and domestic products are like products; and (b) whether the imported products are taxed in excess of the domestic products. If the answers to both questions are affirmative, there is a violation of Article III:2, first sentence. If the answer to one question is negative, there is a need to examine further whether the measure is consistent with Article III:2, second sentence."(196) 125. In Canada - Periodicals, the Appellate Body also reiterated its statement from Japan - Alcoholic Beverages II that Article III:2, second sentence, contemplates a "broader category of products" than Article III:2, first sentence: "Any measure that indirectly affects the conditions of competition between imported and like domestic products would come within the provisions of Article III:2, first sentence, or by implication, second sentence, given the broader application of the latter."(197) 126. Further, in Canada - Periodicals, the Appellate Body rejected Canada's argument that the imported and domestic periodicals in question were only imperfectly substitutable with each other and, therefore, did not fall under the term "directly competitive or substitutable product": "A case of perfect substitutability would fall within Article III:2, first sentence, while we are examining the broader prohibition of the second sentence."(198) 127. In Korea - Alcoholic Beverages, the Appellate Body examined the Panel's finding that Korean tax laws concerning liquor products were inconsistent with Article III:2. In rejecting Korea's appeal that "potential competition" was not enough to find that subject products were "directly competitive or substitutable products", the Appellate Body stated as follows: "The first sentence of Article III:2 also forms part of the context of the term. 'Like' products are a subset of directly competitive or substitutable products: all like products are, by definition, directly competitive or substitutable products, whereas not all 'directly competitive or substitutable' products are 'like'. |
