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Issues covered by the WTO’s committees and agreements

REPERTORY OF APPELLATE BODY REPORTS

National Treatment


ON THIS PAGE:

> Article III:1 of the GATT 1994 — General principle
> Relationship between Article II and Article III:2 of the GATT 1994
> Article III:2 of the GATT 1994 — Tax discrimination. See also Taxation (T.3)
> Article III:2 of the GATT 1994, first sentence — “like products”. See also National Treatment, Article III:4 of the GATT 1994 — Regulatory discrimination (N.1.9); Textiles and Clothing Agreement, Article 6.2 — “like products” (T.7.5); TBT Agreement, Article 2.1 — MFN and national treatment obligations, “like products” (T.4.2A.4)
> Article III:2 of the GATT 1994, first sentence — “in excess of”
> Article III:2 of the GATT 1994 — Notions of “like” and “directly competitive or substitutable” products
> Article III:2 of the GATT 1994, second sentence — “directly competitive or substitutable” products. See also Directly Competitive or Substitutable Products (D.1); Textiles and Clothing Agreement, Article 6.2 — “directly competitive products” (T.7.4)
> Article III:2 of the GATT 1994, second sentence — “not similarly taxed”
> Article III:2 of the GATT 1994, second sentence — “so as to afford protection”
> Article III:4 of the GATT 1994 — Regulatory discrimination. See also National Treatment, Article III:2 of the GATT 1994, first sentence — “like products” (N.1.3); Textiles and Clothing Agreement, Article 6.2 — “like products” (T.7.5); TBT Agreement, Article 2.1 — MFN and national treatment obligations, “like products” (T.4.2A.4)
> Article III:4 of the GATT 1994 — “affecting”
> Article III:4 of the GATT 1994 — “less favourable treatment”. See also MFN Treatment (M.2); National Treatment, Article XVII of the GATS (N.1.13); National Treatment, Article 3.1 of the TRIPS Agreement (N.1.14); TBT Agreement, Article 2.1 — MFN and national treatment obligations, “treatment no less favourable” (T.4.2A.5)
> Article III:8 of the GATT 1994 — Derogations from the National Treatment Obligation. See also SCM Agreement, Relationship between the SCM Agreement and the GATT 1994 (S.2.41); SCM Agreement, Relationship between the SCM Agreement and the TRIMs Agreement (S.2.45); TRIMs Agreement (T.8A)
> Relationship between Article III and Article XX. See also General Exceptions: Article XX of the GATT 1994, Article XX(g) — Jurisdictional limitation (G.3.10)
> Article XVII of the GATS. See also MFN Treatment, Article II of the GATS (M.2.2); National Treatment, Article III:4 of the GATT 1994 — “less favourable treatment” (N.1.11)
> Article 3.1 of the TRIPS Agreement. See also National Treatment, Article III:4 of the GATT 1994 — “less favourable treatment” (N.1.11)

N.1.1 Article III:1 of the GATT 1994 — General principle     back to top

N.1.1.1 Japan — Alcoholic Beverages II, pp. 16–17, DSR 1996:I, 97, at 109–110
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

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’”. Toward this end, Article III obliges Members of the WTO to provide equality of competitive conditions for imported products in relation to domestic products. … 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. …
 

… 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. …
 

N.1.1.2 Japan — Alcoholic Beverages II, p. 18, DSR 1996:I, 97, at 111
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

… 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.
 

N.1.1.3 Japan — Alcoholic Beverages II, p. 18, DSR 1996:I, 97, at 111–112
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

… 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. …
 

N.1.1.4 EC — Asbestos, para. 93
(WT/DS135/AB/R)
 

… However, both of these paragraphs of Article III constitute specific expressions of the overarching, “general principle”, set forth in Article III:1 of the GATT 1994. As we have previously said, the “general principle” set forth in Article III:1 “informs” the rest of Article III and acts “as a guide to understanding and interpreting the specific obligations contained” in the other paragraphs of Article III, including paragraph 4. Thus, in our view, Article III:1 has particular contextual significance in interpreting Article III:4, as it sets forth the “general principle” pursued by that provision. Accordingly, in interpreting the term “like products” in Article III:4, we must turn, first, to the “general principle” in Article III:1, rather than to the term “like products” in Article III:2.
 

N.1.1A Relationship between Article II and Article III:2 of the GATT 1994     back to top

N.1.1A.1 India — Additional Import Duties, Footnote 304 to para. 153
(WT/DS360/AB/R)
 

… The Panel and the participants also agree that the Additional Duty and the Extra-Additional Duty are border charges subject to the terms of Article II, and that they are not disciplined by the provisions of Article III as “internal taxes”. The Ad Note to Article III provides that “any internal tax or other internal charge” that applies to both domestic and imported products, but which is “collected or enforced” in respect of the imported product “at the time or point of importation”, is “nevertheless to be regarded” as subject to the provisions of Article III. Whether a measure is a “charge” to which Article II:2(a) applies, or an “internal tax or other internal charge” referred to in the Ad Note to Article III, has to be decided in the light of the characteristics of the measure and the circumstances of the case.
 

N.1.1A.2 China — Auto Parts, paras. 139, 141 and Footnote 209
(WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R)
 

… as the Appellate Body has previously observed, the “fundamental structure and logic” of a covered agreement may require panels to determine whether a measure falls within the scope of a particular provision or covered agreement before proceeding to assess the consistency of the measure with the substantive obligations imposed under that provision or covered agreement. We consider this to be just such a case, particularly in the light of the Panel’s observation — with which China expressly agrees — that “a charge cannot be at the same time an ‘ordinary customs duty’ under Article II:1(b) of the GATT 1994 and an ‘internal tax or other internal charge’ under Article III:2 of the GATT”. If, as the Panel considered, the charge imposed on automobile manufacturers could fall within the scope of either the first sentence of Article II:1(b) or Article III:2, then the Panel had to begin its analysis by ascertaining which of these provisions applied in the circumstances of this dispute.
 

...
 

It seems to us that an examination of whether a particular charge is an internal charge or a border measure involves consideration of all three types of charges, that is: ordinary customs duties under the first sentence of Article II:1(b); other duties and charges under the second sentence of Article II:1(b);209 and internal charges and taxes under Article III:2. This should assist a panel in understanding the relationship among these fundamental GATT provisions. In this case the Panel could have undertaken a more complete analysis of the architecture of Article III:2 and both sentences of Article II:1(b) of the GATT 1994. However, its resolution of the threshold question was not affected by the fact that the Panel did not do so. We note that China has recorded “0” in the “Other Duties and Charges” column of its Schedule of Concessions in respect of the products at issue in this dispute.
 

N.1.1A.3 China — Auto Parts, paras. 161–163, 165
(WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R)
 

Like the Panel, we consider that the adjectives “internal” and “imported” suggest that the charges falling within the scope of Article III are charges that are imposed on goods that have already been “imported”, and that the obligation to pay them is triggered by an “internal” factor, something that takes place within the customs territory. Further, the second sentence of Article III:2 expressly refers to the principles set forth in Article III:1. The Appellate Body has stated that Article III:1 articulates a general principle, that informs all of Article III, that internal measures should not be applied so as to afford protection to domestic production. We note that, in addition to laws, regulations and requirements affecting, inter alia, the use and sale of imported goods on the internal market, the first paragraph of Article III also specifically mentions “internal quantitative regulations requiring the … use of products in specified amounts or proportions” as among the types of measures that should not be applied so as to afford protection to domestic production, and such measures are subject to the specific disciplines of Article III:5, which also serves as relevant context.
 

As already mentioned, in examining the scope of application of Article III:2, in relation to Article II:1(b), first sentence, the time at which a charge is collected or paid is not decisive. In the case of Article III:2, this is explicitly stated in the GATT 1994 itself, where the Ad Note to Article III specifies that when an internal charge is “collected or enforced in the case of the imported product at the time or point of importation”, such a charge “is nevertheless to be regarded” as an internal charge. What is important, however, is that the obligation to pay a charge must accrue due to an internal event, such as the distribution, sale, use or transportation of the imported product.
 

This leads us, like the Panel, to the view that a key indicator of whether a charge constitutes an “internal charge” within the meaning of Article III:2 of the GATT 1994 is “whether the obligation to pay such charge accrues because of an internal factor (e.g., because the product was re-sold internally or because the product was used internally), in the sense that such ‘internal factor’ occurs after the importation of the product of one Member into the territory of another Member”. We also observe that the Harmonized System does not serve as relevant context for the interpretation of the term “internal charges” in Article III:2.
 

...
 

In our view, accepting that a charge imposed on auto parts following, and as a consequence of, their assembly into a complete motor vehicle can constitute an ordinary customs duty would significantly limit the scope of “internal charges” that fall within the scope of Article III:2 of the GATT 1994. We also share the concerns expressed by the Panel to the effect that the security and predictability of tariff concessions would be undermined if ordinary customs duties could be applied based on factors and events that occur internally, rather than at the moment and by virtue of importation, and that this, in turn, would upset the carefully negotiated and balanced structure of key GATT rights and obligations, including the different disciplines imposed on ordinary customs duties and internal charges.
 

N.1.1A.4 China — Auto Parts, para. 171
(WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R)
 

… a panel’s determination of whether a specific charge falls under Article II:1(b) or Article III:2 of the GATT 1994 must be made in the light of the characteristics of the measure and the circumstances of the case. In many cases this will be a straightforward exercise. In others, the picture will be more mixed, and the challenge faced by a panel more complex. A panel must thoroughly scrutinize the measure before it, both in its design and in its operation, and identify its principal characteristics. Having done so, the Panel must then seek to identify the leading or core features of the measure at issue, those that define its “centre of gravity” for purposes of characterizing the charge that it imposes as an ordinary customs duty or an internal charge. It is not surprising, and indeed to be expected, that the same measure may exhibit some characteristics that suggest it is a measure falling within the scope of Article II:1(b), and others suggesting it is a measure falling within the scope of Article III:2. In making its objective assessment of the applicability of specific provisions of the covered agreements to a measure properly before it, a panel must identify all relevant characteristics of the measure, and recognize which features are the most central to that measure itself, and which are to be accorded the most significance for purposes of characterizing the relevant charge and, thereby, properly determining the discipline(s) to which it is subject under the covered agreements.
 

N.1.1A.5 China — Auto Parts, paras. 177–178
(WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R)
 

In contrast, regarding the characteristics of the measures at issue that might suggest that the charge imposed thereunder is an ordinary customs duty … Ultimately, the Panel considered that none of these factors, nor all of them taken together, was determinative of the issue of the legal characterization of the charge imposed under the measures at issue in this case.
 

We see no error in the Panel’s approach. Taking each of these criteria in turn, we first observe that the way in which a Member’s domestic law characterizes its own measures, although useful, cannot be dispositive of the characterization of such measures under WTO law. Secondly, “the intent, stated or otherwise, of the legislators is not conclusive” as to such characterization. Thirdly, [although] the Panel acknowledged that parts imported by automobile manufacturers are deemed to remain under bond … the Panel also found that there is no physical confinement or any other restriction by customs authorities on the use of these auto parts in the internal market so that the bond requirement is in the nature of a financial guarantee. Lastly, with respect to the administration of the measures at issue by customs authorities, we recall that, in addition to the [General Administration of Customs], other agencies within the Chinese Government have a role under those measures. … In addition, as the Panel recognized, and as is the case with all of the criteria we have just mentioned, a degree of caution must be exercised in attributing decisive weight to characteristics that fall exclusively within the control of WTO Members, “because otherwise Members could determine by themselves which of the provisions would apply to their charges”.
 

N.1.1A.6 China — Auto Parts, para. 243
(WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R)
 

Thus, it appears to us that the Panel considered that there were distinct charges imposed under Decree 125, and that it could characterize the “charge” imposed on imports of CKD and SKD kits under Article 2(2) of Decree 125 differently, as an ordinary customs duty. However, the Panel did not explain why this was so. Earlier in our analysis, we expressed the view that, in dealing with the threshold issue, the Panel properly scrutinized the key characteristics of the charge, evaluated the significance of those characteristics, and determined that the charge imposed under the measures at issue was an internal charge. In contrast, the Panel did not explain how or why the characteristics of the “charge” imposed on imports of CKD and SKD kits under Article 2(2) differed from those that it had earlier identified in its resolution of the threshold issue. Nor did it explain why such characteristics required characterization of the “charge” imposed on CKD and SKD kits imported under Article 2(2) as an ordinary customs duty. This does not seem to us to have been a proper approach to the characterization of this “charge”.
 

N.1.2 Article III:2 of the GATT 1994 — Tax discrimination. See also Taxation (T.3)     back to top

N.1.2.1 Canada — Periodicals, p. 19, DSR 1997:I, p. 449 at 464
(WT/DS31/AB/R)
 

Article III:2, first sentence, uses the words “directly or indirectly” in two different contexts: one in relation to the application of a tax to imported products and the other in relation to the application of a tax to like domestic products. 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.
 

N.1.2.2 Canada — Periodicals, pp. 22–23, DSR 1997:I, 449, at 468
(WT/DS31/AB/R)
 

… there 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.
 

N.1.3 Article III:2 of the GATT 1994, first sentence — “like products”. See also National Treatment, Article III:4 of the GATT 1994 — Regulatory discrimination (N.1.9); Textiles and Clothing Agreement, Article 6.2 — “like products” (T.7.5); TBT Agreement, Article 2.1 — MFN and national treatment obligations, “like products” (T.4.2A.4)     back to top

N.1.3.1 SCOPE OF “LIKE PRODUCTS”
 

N.1.3.1.1 Japan — Alcoholic Beverages II, pp. 19–20, DSR 1996:I, p. 97 at 112–113
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

Because the 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, we agree with the Panel that the first sentence of Article III:2 must be construed narrowly so as not to condemn measures that its strict terms are not meant to condemn. …
 

How narrowly is a matter that should be determined separately for each tax measure in each case. We agree with the practice under the GATT 1947 of determining whether imported and domestic products are “like” on a case-by-case basis. …
 

N.1.3.1.2 Japan — Alcoholic Beverages II, p. 21, DSR 1996:I, p. 97 at 114
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

No one approach to exercising judgement will be appropriate for all cases. The criteria in Border Tax Adjustments should be examined, but there can be no one precise and absolute definition of what is “like”. 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. …
 

N.1.3.1.3 Canada — Periodicals, p. 28, DSR 1997:I, p. 449 at 473
(WT/DS31/AB/R)
 

… A case of perfect substitutability would fall within Art. III:2, first sentence, while we are examining the broader prohibition of the second sentence. …
 

N.1.3.1.4 EC — Asbestos, paras. 94–95
(WT/DS135/AB/R)
 

… we observe that, although the obligations in Articles III:2 and III:4 both apply to “like products”, the text of Article III:2 differs in one important respect from the text of Article III:4. Article III:2 contains two separate sentences, each imposing distinct obligations: the first lays down obligations in respect of “like products”, while the second lays down obligations in respect of “directly competitive or substitutable” products. By contrast, Article III:4 applies only to “like products” and does not include a provision equivalent to the second sentence of Article III:2. …
 

… this textual difference between paragraphs 2 and 4 of Article III has considerable implications for the meaning of the term “like products” in these two provisions. In Japan — Alcoholic Beverages, we concluded, in construing Article III:2, that the two separate obligations in the two sentences of Article III:2 must be interpreted in a harmonious manner that gives meaning to both sentences in that provision. We observed there that the interpretation of one of the sentences necessarily affects the interpretation of the other. Thus, the scope of the term “like products” in the first sentence of Article III:2 affects, and is affected by, the scope of the phrase “directly competitive or substitutable” products in the second sentence of that provision. …
 

N.1.3.1.5 Philippines — Distilled Spirits, para. 149
(WT/DS396/AB/R, WT/DS403/AB/R)
 

We do not understand the statements by the Appellate Body in Canada — Periodicals and in Korea — Alcoholic Beverages to mean that only products that are perfectly substitutable can fall within the scope of Article III:2, first sentence. This would be too narrow an interpretation and would reduce the scope of the first sentence essentially to identical products. Rather, we consider that, under the first sentence, products that are close to being perfectly substitutable can be “like products”, whereas products that compete to a lesser degree would fall within the scope of the second sentence.
 

N.1.3.1.6 Philippines — Distilled Spirits, para. 168
(WT/DS396/AB/R, WT/DS403/AB/R)
 

The determination of “likeness” under Article III:2, first sentence, of the GATT 1994 should be made on a case-by-case basis. If two spirits are considered to be “like products” in a given market, this does not necessarily mean that they would be considered “like products” in another market. … in order to establish whether two products are “like” within the meaning of Article III:2 of the GATT 1994, a panel needs to examine the nature and the extent of the competitive relationship between and among products, which will depend on the market where these products compete.
 

N.1.3.2 CRITERIA
 

N.1.3.2.1 Japan — Alcoholic Beverages II, pp. 20–21, DSR 1996:I, p. 97 at 113–114
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

… In applying the criteria cited in Border Tax Adjustments to the facts of any particular case, and in considering other criteria that may also be relevant in certain cases, panels can only apply their best judgement in determining whether in fact products are “like”. This will always involve an unavoidable element of individual, discretionary judgment … it is a discretionary decision that must be made in considering the various characteristics of products in individual cases.
 

N.1.3.2.2 Japan — Alcoholic Beverages II, p. 22, DSR 1996:I, p. 97 at 114–115
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

Uniform classification in tariff nomenclatures based on the Harmonized System (the “HS”) was recognized in GATT 1947 practice as providing a useful basis for confirming “likeness” in products. However, there is a major difference between tariff classification nomenclature and tariff bindings or concessions made by Members of the WTO under Article of the GATT 1994. …
 

… tariff bindings that include a wide range of products are not a reliable criterion for determining or confirming product “likeness” under Article III:2.
 

N.1.3.2.3 Canada — Periodicals, p. 21, DSR 1997:I, p. 449 at 466
(WT/DS31/AB/R)
 

… As the Panel recognized, the proper test is that a determination of “like products” for the purposes of Article III:2, first sentence, must be construed narrowly, on a case-by-case basis, by examining relevant factors including:
 

(i) the product’s end-uses in a given market;
 

(ii) consumers’ tastes and habits; and
 

(iii) the product’s properties, nature and quality.
 

N.1.3.2.4 Philippines — Distilled Spirits, paras. 119–121
(WT/DS396/AB/R, WT/DS403/AB/R)
 

While in the determination of “likeness” a panel may logically start from the physical characteristics of the products, none of the criteria that a panel considers necessarily has an overarching role in the determination of “likeness” under Article III:2 of the GATT 1994. A panel examines these criteria in order to make a determination about the nature and extent of a competitive relationship between and among the products.
 

… products that have very similar physical characteristics may not be “like”, within the meaning of Article III:2, if their competitiveness or substitutability is low, while products that present certain physical differences may still be considered “like” if such physical differences have a limited impact on the competitive relationship between and among the products.
 

… we do not consider … that the Panel committed an error of interpretation when it found that “likeness under the first sentence of Article III:2 is not limited to products that are identical”. This statement by the Panel … is consistent with the notion that, while physical characteristics are one of the relevant criteria in the determination of “likeness” under Article III:2, even products that present certain differences may still be considered “like” if the nature and extent of their competitive relationship justifies such a determination.
 

N.1.3.2.5 Philippines — Distilled Spirits, paras. 124–125
(WT/DS396/AB/R, WT/DS403/AB/R)
 

The Panel considered that a difference in raw materials used in the production would only be relevant to the extent that it resulted in final products that are not similar. … Thus, the Panel focused on the physical characteristics of distilled spirits as final products, and not on those of the raw materials or production processes used to make the final products.
 

We consider that, in spite of differences in the raw materials used to make the products, if these differences do not affect the final products, these products can still be found to be “like” within the meaning of Article III:2 of the GATT 1994. Article III:2, first sentence, refers to “like products”, not to their raw material base. If differences in raw materials leave fundamentally unchanged the competitive relationship among the final products, the existence of these differences would not necessarily negate a finding of “likeness” under Article III:2. As we have explained above, the determination of what are “like products” under Article III:2 is not focused exclusively on the physical characteristics of the products, but is concerned with the nature and the extent of the competitive relationship between and among the products. We consider, therefore, that as long as the differences among the products, including a difference in the raw material base, leave fundamentally unchanged the competitive relationship among the final products, the existence of these differences does not prevent a finding of “likeness” if, by considering all factors, the panel is able to come to the conclusion that the competitive relationship among the products is such as to justify a finding of “likeness” under Article III:2.
 

N.1.3.2.6 Philippines — Distilled Spirits, para. 128
(WT/DS396/AB/R, WT/DS403/AB/R)
 

… While the Panel addressed presentation and labelling under consumers’ tastes and habits, we observe that, as distilled spirits are sold in labelled bottles, their presentation and labelling are also concerned with the physical characteristics of the product and not only with the perceptions of the consumer. The fact that domestic Philippine distilled spirits made from designated raw materials closely replicate imported distilled spirits made from non-designated raw materials supports the Panel’s overall finding that, within each type, these are “like products”. Even where certain differences remain, domestic distilled spirits made from designated raw materials are presented to consumers so as to be indistinguishable from imported distilled spirits made from non-designated raw materials. This suggests, in our view, that even where the products are made from different raw materials and may, as a consequence, present some physical differences that are not completely eliminated in the production process, they can be in a sufficiently close competitive relationship to be considered “like products” within the meaning of Article III:2, first sentence, of the GATT 1994.
 

N.1.3.2.7 Philippines — Distilled Spirits, paras. 131–132
(WT/DS396/AB/R, WT/DS403/AB/R)
 

… the criteria to establish “likeness” under Article III:2, first sentence, of the GATT 1994 are not exhaustive and are not set forth in Article III:2, nor in any other provision of the covered agreements. Rather, these criteria are tools available to panels for organizing and assessing the evidence relating to the competitive relationship between and among the products in order to establish “likeness” under Article III:2, first sentence. While distinct, these criteria are not mutually exclusive. Certain evidence, such as that relating to the perceptibility of differences, may well fall under more than one criterion.
 

… While consumer perception of products is highly relevant to the overall determination of “likeness” under Article III:2, we believe that this element may reach beyond the products’ properties, nature, and qualities, which concern the objective physical characteristics of the products. Indeed, consumer perception of products may be more concerned with consumers’ tastes and habits than with physical characteristics.
 

N.1.3.2.8 Philippines — Distilled Spirits, paras. 161, 163
(WT/DS396/AB/R, WT/DS403/AB/R)
 

… tariff classification can be a helpful sign of similarity only if it is sufficiently detailed. We do not consider that HS heading 2208, which groups together all distilled spirits, as well as other liquors and unflavoured neutral spirits for human consumption or for industrial purposes, constitutes a tariff classification that is sufficiently detailed to provide an indication of “likeness”, within types of distilled spirits, between domestic distilled spirits made from designated materials and imported distilled spirits made from non-designated materials.
 

...
 

… [The HS Explanatory Notes] to the six-digit HS codes for both brandy and whisky specify the material from which the spirit is distilled, namely, grape wine or grape marc for brandy and mash of cereal grains for whisky. This, in our view, provides an indication that tariff classification would not suggest that domestic brandies and whiskies made from designated raw materials are “like” imported brandies and whiskies made from non-designated raw materials. …
 

N.1.4 Article III:2 of the GATT 1994, first sentence — “in excess of”     back to top

N.1.4.1 Japan — Alcoholic Beverages II, pp. 18–19, DSR 1996:I, p. 97 at 112
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

… Read in their context and in the light of the overall object and purpose of the WTO Agreement, the words of the first sentence require an examination of the conformity of an internal tax measure with Article III by determining, first, whether the taxed imported and domestic products are “like” and, second, whether the taxes applied to the imported products are “in excess of” those applied to the like domestic products. 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 like domestic products, then the measure is inconsistent with Article III:2, first sentence.
 

N.1.4.2 Japan — Alcoholic Beverages II, p. 23, DSR 1996:I, p. 97 at 115
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

… Even the smallest amount of “excess” is too much. “The prohibition of discriminatory taxes in Article III:2, first sentence, is not conditional on a ‘trade effects test’ nor is it qualified by a de minimis standard.” …
 

N.1.4.3 Thailand — Cigarettes (Philippines), para. 112
(WT/DS371/AB/R)
 

… Article III:2, first sentence, concerns circumstances where imported and like domestic products are subject “directly or indirectly” to internal taxes or other internal charges “of any kind”. This language suggests that the provision applies to a broad range of measures. Regarding the requirement of “not … in excess of”, the Appellate Body has clarified that a finding of inconsistency under Article III:2, first sentence, is not conditional on a “trade effects test”, and that even the smallest amount of “excess” is too much. … When … a measure subjects imported products to taxes or charges in excess of those applied to like domestic products, it will be inconsistent with the first sentence of Article III:2.
 

N.1.4.4 Thailand — Cigarettes (Philippines), paras. 115–117
(WT/DS371/AB/R)
 

… Thailand contends that it cannot be WTO-inconsistent to require resellers to complete “administrative formalities” in order to obtain input tax credits necessary to achieve zero VAT liability. …
 

… We consider, however, that a proper conception of Thailand’s measure clarifies that it is not the mere imposition of administrative requirements that creates a differential tax burden, but rather that only resellers of imported cigarettes will incur VAT liability as a consequence of failing to offset output tax. Resellers of imported cigarettes are subject to VAT liability in defined circumstances under Thai law, whereas resellers of domestic cigarettes, due to a complete exemption from VAT, are not. Based on this understanding of the measure, we therefore agree with the Panel that Thailand subjects imported cigarettes to internal taxes in excess of those applied to like domestic cigarettes, within the meaning of Article III:2, first sentence, of the GATT 1994.
 

… In any event, we do not consider that Thailand’s measure precludes a finding of inconsistency with Article III:2 due to the fact that resellers of imported cigarettes may take action to avoid the imposition of VAT liability. In our view, the availability of such a course of action does not alter the legal assessment of whether, under Thai law, imported cigarettes are subject to internal taxes or other internal charges in excess of those applied to domestic cigarettes. As we have explained, Thailand’s measure provides for circumstances in which resellers of imported cigarettes will be subject to VAT liability, to which resellers of domestic cigarettes will never be subject. In this respect, we agree with the Panel’s reliance on Korea — Various Measures on Beef, where the Appellate Body stated, in the context of its Article III:4 analysis, that “the intervention of some element of private choice does not relieve Korea of responsibility under the GATT 1994 for the resulting establishment of competitive conditions less favourable for the imported product than for the domestic product”.
 

N.1.4.5 Thailand — Cigarettes (Philippines), para. 118
(WT/DS371/AB/R)
 

We also disagree with Thailand’s suggestion that the Panel’s finding would limit the ability of WTO Members to ensure the proper administration of their tax regimes. Again, the Panel considered that Thailand’s measure was inconsistent with Article III:2, first sentence, not because it prescribed conditions for obtaining tax credits, but rather because those conditions applied only in respect of resellers of imported cigarettes, and did not “automatically and irrevocably offset tax liabilities incurred by [those resellers] in every case”. WTO Members remain free “to administer and collect internal taxes as they see fit”, so long as they do so “in conformity with Article III:2”. Imposing legal requirements that result in tax liability on imported products when resellers do not satisfy prescribed conditions necessary to avoid that liability, but which never result in tax liability on like domestic products, is inconsistent with the requirements of Article III:2, first sentence.
 

N.1.5 Article III:2 of the GATT 1994 — Notions of “like” and “directly competitive or substitutable” products     back to top

N.1.5.1 Japan — Alcoholic Beverages II, p. 25, DSR 1996:I, p. 97 at 117
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

… As with “like products” under the first sentence, the determination of the appropriate range of “directly competitive or substitutable products” under the second sentence must be made on a case-by-case basis.
 

In this case, the Panel emphasized the need to look not only at such matters as physical characteristics, common end-uses, and tariff classifications, but also at the “market-place”. This seems appropriate. … It does not seem inappropriate to look at competition in the relevant markets as one among a number of means of identifying the broader category of products that might be described as “directly competitive or substitutable”.
 

Nor does it seem inappropriate to examine elasticity of substitution as one means of examining those relevant markets.
 

N.1.5.2 Canada — Periodicals, p. 19, DSR 1997:I, p. 449 at 464–465
(WT/DS31/AB/R)
 

… 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.
 

N.1.5.3 Korea — Alcoholic Beverages, para. 118
(WT/DS75/AB/R, WT/DS84/AB/R)
 

… “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”. The notion of like products must be construed narrowly but the category of directly competitive or substitutable products is broader. While perfectly substitutable products fall within Article III:2, first sentence, imperfectly substitutable products can be assessed under Article III:2, second sentence.
 

N.1.5.4 Philippines — Distilled Spirits, para. 148
(WT/DS396/AB/R, WT/DS403/AB/R)
 

We observe that both the analysis of “likeness” under Article III:2, first sentence, of the GATT 1994, and the analysis of direct competitiveness and substitutability under Article III:2, second sentence, require consideration of the competitive relationship between imported and domestic products. However, “likeness” is a narrower category than “directly competitive and substitutable”. Thus, the degree of competition and substitutability that is required under Article III:2, first sentence, must be higher than that under Article III:2, second sentence. …
 

N.1.6 Article III:2 of the GATT 1994, second sentence — “directly competitive or substitutable” products. See also Directly Competitive or Substitutable Products (D.1); Textiles and Clothing Agreement, Article 6.2 — “directly competitive products” (T.7.4)     back to top

N.1.6.1 Korea — Alcoholic Beverages, paras. 114–115
(WT/DS75/AB/R, WT/DS84/AB/R)
 

The term “directly competitive or substitutable” describes a particular type of relationship between two products, one imported and the other domestic. It is evident from the wording of the term that the essence of that relationship is that the products are in competition. This much is clear both from the word “competitive” which means “characterized by competition”, and from the word “substitutable” which means “able to be substituted”. The context of the competitive relationship is necessarily the marketplace since this is the forum where consumers choose between different products. Competition in the marketplace is a dynamic, evolving process. Accordingly, the wording of the term “directly competitive or substitutable” implies that the competitive relationship between products is not to be analyzed exclusively by reference to current consumer preferences. In our view, the word “substitutable” indicates that the requisite relationship may exist between products that are not, at a given moment, considered by consumers to be substitutes but which are, nonetheless, capable of being substituted for one another.
 

Thus, according to the ordinary meaning of the term, products are competitive or substitutable when they are interchangeable or if they offer, as the Panel noted, “alternative ways of satisfying a particular need or taste”. Particularly in a market where there are regulatory barriers to trade or to competition, there may well be latent demand.
 

N.1.6.2 Korea — Alcoholic Beverages, para. 120
(WT/DS75/AB/R, WT/DS84/AB/R)
 

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”. The object and purpose of Article III confirms that the scope of the term “directly competitive or substitutable” cannot be limited to situations where consumers already regard products as alternatives. If reliance could be placed only on current instances of substitution, the object and purpose of Article III:2 could be defeated by the protective taxation that the provision aims to prohibit. …
 

N.1.6.3 Korea — Alcoholic Beverages, para. 124
(WT/DS75/AB/R, WT/DS84/AB/R)
 

… the term “directly competitive or substitutable” does not prevent a panel from taking account of evidence of latent consumer demand as one of a range of factors to be considered when assessing the competitive relationship between imported and domestic products under Article III:2, second sentence, of the GATT 1994. …
 

N.1.6.4 Korea — Alcoholic Beverages, para. 127
(WT/DS75/AB/R, WT/DS84/AB/R)
 

… the object and purpose of Article III is the maintenance of equality of competitive conditions for imported and domestic products. It is, therefore, not only legitimate, but even necessary, to take account of this purpose in interpreting the term “directly competitive or substitutable product”.
 

N.1.6.5 Korea — Alcoholic Beverages, para. 134
(WT/DS75/AB/R, WT/DS84/AB/R)
 

In taking issue with the use of the term “nature of competition”, Korea, in effect, objects to the Panel’s sceptical attitude to quantification of the competitive relationship between imported and domestic products. For the reasons set above, we share the Panel’s reluctance to rely unduly on quantitative analyses of the competitive relationship. In our view, an approach that focused solely on the quantitative overlap of competition would, in essence, make cross-price elasticity the decisive criterion in determining whether products are “directly competitive or substitutable”. …
 

N.1.6.6 Korea — Alcoholic Beverages, para. 137
(WT/DS75/AB/R, WT/DS84/AB/R)
 

It is, of course, true that the “directly competitive or substitutable” relationship must be present in the market at issue. … It is also true that consumer responsiveness to products may vary from country to country. This does not, however, preclude consideration of consumer behaviour in a country other than the one at issue. It seems to us that evidence from other markets may be pertinent to the examination of the market at issue, particularly when demand on that market has been influenced by regulatory barriers to trade or to competition. Clearly, not every other market will be relevant to the market at issue. But if another market displays characteristics similar to the market at issue, then evidence of consumer demand in that other market may have some relevance to the market at issue. This, however, can only be determined on a case-by-case basis, taking account of all relevant facts.
 

N.1.6.7 Korea — Alcoholic Beverages, paras. 142–143
(WT/DS75/AB/R, WT/DS84/AB/R)
 

… Some grouping is almost always necessary in cases arising under Article III:2, second sentence, since generic categories commonly include products with some variation in composition, quality, function and price, and thus commonly give rise to sub-categories. From a slightly different perspective, we note that “grouping” of products involves at least a preliminary characterization by the treaty interpreter that certain products are sufficiently similar as to, for instance, composition, quality, function and price, to warrant treating them as a group for convenience in analysis. But, the use of such “analytical tools” does not relieve a panel of its duty to make an objective assessment of whether the components of a group of imported products are directly competitive or substitutable with the domestic products. …
 

Whether, and to what extent, products can be grouped is a matter to be decided on a case-by-case basis. …
 

N.1.6.8 Philippines — Distilled Spirits, paras. 205, 207
(WT/DS396/AB/R, WT/DS403/AB/R)
 

… the Panel appropriately framed the analysis as one aimed at determining whether competition between imported and domestic distilled spirits in the Philippines is sufficiently direct so that these products could be properly characterized as “directly competitive or substitutable”. … The requisite degree of competition is met where the imported and domestic products are characterized by a high, but imperfect, degree of substitutability. As the Appellate Body found, this will be the case where the imported and domestic products are “interchangeable” or offer “alternative ways of satisfying a particular need or taste”.
 

...
 

… We note, in this respect, that the Panel expressly derived, from its statement that the “question before us … is not so much what the ‘degree of competition’ between the products at issue is, but what is the ‘nature’ or ‘quality’ of their ‘competitive relationship’”, the conclusion that it “should not place too much emphasis on quantitative analyses”. … In de-emphasizing the role played by quantitative analyses of substitutability, the Panel followed the guidance provided by the Appellate Body in previous cases. …
 

N.1.6.9 Philippines — Distilled Spirits, para. 215
(WT/DS396/AB/R, WT/DS403/AB/R)
 

… We consider that price is very relevant in assessing whether imported and domestic products stand in a sufficiently direct competitive relationship in a given market. This is because evidence of price competition indicates that the imported product exercises competitive constraints on the domestic product, and vice versa. In this respect, we agree with the Philippines that evidence of major price differentials could demonstrate that the imported and domestic products are in completely separate markets. …
 

N.1.6.10 Philippines — Distilled Spirits, paras. 218–219
(WT/DS396/AB/R, WT/DS403/AB/R)
 

We do not agree with the Philippines that Article III:2, second sentence, of the GATT 1994 requires identity in the “nature and frequency” of the consumer’s purchasing behaviour. If that were the case, the competitive relationship between the imported and domestic products in a given market would only be assessed with reference to current consumer preferences. … requiring identity in frequency and nature of consumers’ purchase decisions, as suggested by the Philippines, would not sufficiently account for latent demand for imported distilled spirits in the Philippine market.
 

Moreover, in determining whether imported and domestic distilled spirits offer “alternative ways of satisfying a particular need or taste” in the Philippines, the Panel was required to examine both “latent and extant demand” for imported distilled spirits in the Philippine market. …
 

N.1.6.11 Philippines — Distilled Spirits, paras. 221–222
(WT/DS396/AB/R, WT/DS403/AB/R)
 

… we do not agree with the Philippines that Article III:2, second sentence, requires that competition be assessed in relation to the market segment that is most representative of the “market as a whole”. To the contrary, the Panel was correct in concluding that Article III of the GATT 1994 “does not protect just some instances or most instances, but rather, it protects all instances of direct competition”. This reading is consistent with the Appellate Body’s finding that the object and purpose of the GATT 1994, as reflected in Article III, is “requiring equality of competitive relationships and protecting expectations of equal competitive relationships”. Moreover, current demand for imported spirits in the Philippine market is a function of actual retail prices, which could be distorted by the excise tax system and other related effects, such as higher distribution costs, and lower volumes and economies of scale. …
 

For these reasons, it was reasonable for the Panel to conclude that actual competition in a segment of the market further supports its conclusion that imported and domestic distilled spirits are capable of being substituted in the Philippines. …
 

N.1.6.12 Philippines — Distilled Spirits, paras. 226–227
(WT/DS396/AB/R, WT/DS403/AB/R)
 

We do not agree with the Philippines that [the Panel’s statement that “ the imported and domestic products at issue in this dispute are indeed capable of being directly competitive or substitutable in the future”] is in error. … In our view, … instances of actual competition are also highly probative in relation to potential competition, particularly in this case where imported distilled spirits are subject to excise taxes that are 10 to 40 times higher than those applicable to domestic distilled spirits. … For this reason, instances of current substitution are likely to underestimate latent demand for imported spirits as a result of distortive effects introduced by the excise tax at issue. This is particularly the case for “experience goods” such as distilled spirits, which consumers “tend to purchase because they are familiar with them and with which consumers experiment only reluctantly”.
 

In addition, we do not agree with the Philippines that an analysis of potential competition under Article III:2, second sentence, is limited to an assessment of whether competition would otherwise occur if the challenged taxation were not in place. In our view, such a “but for” test reflects an overly restrictive interpretation of the term “directly competitive or substitutable” products, one which assumes that internal taxation is the only factor restricting potential substitutability. On the contrary, as noted by the Appellate Body, “consumer demand may be influenced by measures other than internal taxation”, such as “earlier protectionist taxation, previous import prohibitions or quantitative restrictions”.
 

N.1.7 Article III:2 of the GATT 1994, second sentence — “not similarly taxed”     back to top

N.1.7.1 Japan — Alcoholic Beverages II, p. 27, DSR 1996:I, p. 97 at 118–119
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

To interpret “in excess of” and “not similarly taxed” identically would deny any distinction between the first and second sentences of Article III:2. Thus, in any given case, there may be some amount of taxation on imported products that may well be “in excess of” the tax on domestic “like products” but may not be so much as to compel a conclusion that “directly competitive or substitutable” imported and domestic products are “not similarly taxed” for the purposes of the Ad Article to Article III:2, second sentence. In other words, there may be an amount of excess taxation that may well be more of a burden on imported products than on domestic “directly competitive or substitutable products” but may nevertheless not be enough to justify a conclusion that such products are “not similarly taxed” for the purposes of Article III:2, second sentence. …
 

N.1.7.2 Japan — Alcoholic Beverages II, p. 27, DSR 1996:I, p. 97 at 119
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

… We agree with the Panel that this amount of differential taxation must be more than de minimis to be deemed “not similarly taxed” in any given case. And, like the Panel, we believe that whether any particular differential amount of taxation is de minimis or is not de minimis must, here too, be determined on a case-by-case basis. Thus, to be “not similarly taxed”, the tax burden on imported products must be heavier than on “directly competitive or substitutable” domestic products, and that burden must be more than de minimis in any given case.
 

N.1.7.3 Canada — Periodicals, p. 29, DSR 1997:I, p. 449 at 474
(WT/DS31/AB/R)
 

… we find that the amount of the taxation is far above the de minimis threshold required by the Appellate Body Report in Japan — Alcoholic Beverages. The magnitude of this tax is sufficient to prevent the production and sale of split-run periodicals in Canada.
 

N.1.7.4 Canada — Periodicals, p. 32, DSR 1997:I, p. 449 at 476
(WT/DS31/AB/R)
 

We therefore conclude on the basis of the above reasons, including the magnitude of the differential taxation, the several statements of the Government of Canada’s explicit policy objectives in introducing the measure and the demonstrated actual protective effect of the measure, that the design and structure of Part V.1 of the Excise Tax Act is clearly to afford protection to the production of Canadian periodicals.
 

N.1.7.5 Chile — Alcoholic Beverages, para. 49
(WT/DS87/AB/R, WT/DS110/AB/R)
 

… We must, therefore, assess the relative tax burden imposed on directly competitive or substitutable domestic and imported products.
 

N.1.7.6 Chile — Alcoholic Beverages, paras. 52–53
(WT/DS87/AB/R, WT/DS110/AB/R)
 

… The examination under the second issue must, therefore, take into account the fact that the group of directly competitive or substitutable domestic and imported products at issue in this case is not limited solely to beverages of a specific alcohol content, falling within a particular fiscal category, but covers all the distilled alcoholic beverages in each and every fiscal category under the New Chilean System.
 

A comprehensive examination of this nature, which looks at all of the directly competitive or substitutable domestic and imported products, shows that the tax burden on imported products, most of which will be subject to a tax rate of 47 per cent, will be heavier than the tax burden on domestic products, most of which will be subject to a tax rate of 27 per cent. …
 

N.1.8 Article III:2 of the GATT 1994, second sentence — “so as to afford protection”     back to top

N.1.8.1 Japan — Alcoholic Beverages II, pp. 27–28, DSR 1996:I, p. 97 at 119
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

This third inquiry under Article III:2, second sentence, must determine whether “directly competitive or substitutable products” are “not similarly taxed” in a way that affords protection. This is not an issue of intent. It is not necessary for a panel to sort through the many reasons legislators and regulators often have for what they do and weigh the relative significance of those reasons to establish legislative or regulatory intent. If the measure is applied to imported or domestic products so as to afford protection to domestic production, then it does not matter that there may not have been any desire to engage in protectionism in the minds of the legislators or the regulators who imposed the measure. It is irrelevant that protectionism was not an intended objective if the particular tax measure in question is nevertheless, to echo Article III:1, “applied to imported or domestic products so as to afford protection to domestic production”. This is an issue of how the measure in question is applied.
 

N.1.8.2 Japan — Alcoholic Beverages II, p. 29, DSR 1996:I, p. 97 at 120
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

Although it is true that the aim of a measure may not be easily ascertained, nevertheless its protective application can most often be discerned from the design, the architecture, and the revealing structure of a measure. …
 

N.1.8.3 Japan — Alcoholic Beverages II, p. 29, DSR 1996:I, p. 97 at 120
(WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
 

… The very magnitude of the dissimilar taxation in a particular case may be evidence of such a protective application, as the Panel rightly concluded in this case. Most often, there will be other factors to be considered as well. In conducting this inquiry, panels should give full consideration to all the relevant facts and all the relevant circumstances in any given case.
 

N.1.8.4 Philippines — Distilled Spirits, para. 250
(WT/DS396/AB/R, WT/DS403/AB/R)
 

… in Japan — Alcoholic Beverages II, the Appellate Body stated that the question of whether dissimilar taxation affords protection is not one of intent, but rather of application of the measure at issue. This requires a “comprehensive and objective analysis of the structure and application of the measure in question on domestic as compared to imported products”. The Appellate Body observed that, “[a]lthough it is true that the aim of a measure may not be easily ascertained, nevertheless its protective application can most often be discerned from the design, the architecture, and the revealing structure of a measure”. The Appellate Body further stated that dissimilar taxation must be more than de minimis, and that in certain cases “[t]he very magnitude of the dissimilar taxation … may be evidence of such a protective application.” In Korea — Alcoholic Beverages, the Appellate Body added that the protective application of dissimilar taxation can only be determined “on a case-by-case basis, taking account of all relevant facts”.
 

N.1.8.5 Philippines — Distilled Spirits, para. 256
(WT/DS396/AB/R, WT/DS403/AB/R)
 

… We agree with the Panel that the assessment of whether the excise tax could affect the competitive relationship between domestic and imported distilled spirits in the Philippine market pertains to the prong of analysis directed at determining whether the products are “directly competitive or substitutable”. … it was not necessary for the Panel to revisit this argument in its assessment of whether the dissimilar taxation of such products afforded protection to domestic production. Moreover, … a finding that a tax measure affords protection to domestic production does not depend upon showing “some identifiable trade effect”. Thus, the question of whether or not the excise tax negatively impacts trade in imported distilled spirits is not determinative of the question of whether the measure affords protection to domestic production.
 

N.1.9 Article III:4 of the GATT 1994 — Regulatory discrimination. See also National Treatment, Article III:2 of the GATT 1994, first sentence — “like products” (N.1.3); Textiles and Clothing Agreement, Article 6.2 — “like products” (T.7.5); TBT Agreement, Article 2.1 — MFN and national treatment obligations, “like products” (T.4.2A.4)     back to top

N.1.9.1 “LIKE PRODUCTS”
 

N.1.9.1.1 EC — Asbestos, para. 89
(WT/DS135/AB/R)
 

… while the meaning attributed to the term “like products” in other provisions of the GATT 1994, or in other covered agreements, may be relevant context in interpreting Article III:4 of the GATT 1994, the interpretation of “like products” in Article III:4 need not be identical, in all respects, to those other meanings.
 

N.1.9.1.2 EC — Asbestos, paras. 91–92
(WT/DS135/AB/R)
 

This meaning suggests that “like” products are products that share a number of identical or similar characteristics or qualities. The reference to “similar” as a synonym of “like” also echoes the language of the French version of Article III:4, “produits similaires”, and the Spanish version, “productos similares”, which, together with the English version, are equally authentic.
 

However, as we have previously observed, “dictionary meanings leave many interpretive questions open”. In particular, this definition does not resolve three issues of interpretation. First, this dictionary definition of “like” does not indicate which characteristics or qualities are important in assessing the “likeness” of products under Article III:4. For instance, most products will have many qualities and characteristics, ranging from physical properties such as composition, size, shape, texture, and possibly taste and smell, to the end-uses and applications of the product. Second, this dictionary definition provides no guidance in determining the degree or extent to which products must share qualities or characteristics in order to be “like products” under Article III:4. Products may share only very few characteristics or qualities, or they may share many. Thus, in the abstract, the term “like” can encompass a spectrum of differing degrees of “likeness” or “similarity”. Third, this dictionary definition of “like” does not indicate from whose perspective “likeness” should be judged. For instance, ultimate consumers may have a view about the “likeness” of two products that is very different from that of the inventors or producers of those products.
 

N.1.9.2 RELATION TO GENERAL PRINCIPLE IN ARTICLE III:1
 

N.1.9.2.1 EC — Asbestos, para. 93
(WT/DS135/AB/R)
 

… However, both of these paragraphs of Article III constitute specific expressions of the overarching, “general principle”, set forth in Article III:1 of the GATT 1994. As we have previously said, the “general principle” set forth in Article III:1 “informs” the rest of Article III and acts “as a guide to understanding and interpreting the specific obligations contained” in the other paragraphs of Article III, including paragraph 4. Thus, in our view, Article III:1 has particular contextual significance in interpreting Article III:4, as it sets forth the “general principle” pursued by that provision. Accordingly, in interpreting the term “like products” in Article III:4, we must turn, first, to the “general principle” in Article III:1, rather than to the term “like products” in Article III:2.
 

N.1.9.2.2 EC — Asbestos, para. 96
(WT/DS135/AB/R)
 

In construing Article III:4, the same interpretive considerations do not arise, because the “general principle” articulated in Article III:1 is expressed in Article III:4, not through two distinct obligations, as in the two sentences in Article III:2, but instead through a single obligation that applies solely to “like products”. Therefore, the harmony that we have attributed to the two sentences of Article III:2 need not and, indeed, cannot be replicated in interpreting Article III:4. Thus, we conclude that, given the textual difference between Articles III:2 and III:4, the “accordion” of “likeness” stretches in a different way in Article III:4.
 

N.1.9.2.3 EC — Asbestos, para. 98
(WT/DS135/AB/R)
 

As we have said, although this “general principle” is not explicitly invoked in Article III:4, nevertheless, it “informs” that provision. Therefore, the term “like product” in Article III:4 must be interpreted to give proper scope and meaning to this principle. In short, there must be consonance between the objective pursued by Article III, as enunciated in the “general principle” articulated in Article III:1, and the interpretation of the specific expression of this principle in the text of Article III:4. This interpretation must, therefore, reflect that, 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”.
 

N.1.9.3 RELATION TO ARTICLE III:2
 

N.1.9.3.1 EC — Asbestos, paras. 94–95
(WT/DS135/AB/R)
 

… we observe that, although the obligations in Articles III:2 and III:4 both apply to “like products”, the text of Article III:2 differs in one important respect from the text of Article III:4. Article III:2 contains two separate sentences, each imposing distinct obligations: the first lays down obligations in respect of “like products”, while the second lays down obligations in respect of “directly competitive or substitutable” products. By contrast, Article III:4 applies only to “like products” and does not include a provision equivalent to the second sentence of Article III:2. …
 

… this textual difference between paragraphs 2 and 4 of Article III has considerable implications for the meaning of the term “like products” in these two provisions. …
 

N.1.9.3.2 EC — Asbestos, para. 99
(WT/DS135/AB/R)
 

As products that are in a competitive relationship in the marketplace could be affected through treatment of imports “less favourable” than the treatment accorded to domestic products, it follows that the word “like” in Article III:4 is to be interpreted to apply to products that are in such a competitive relationship. Thus, a determination of “likeness” under Article III:4 is, fundamentally, a determination about the nature and extent of a competitive relationship between and among products. In saying this, we are mindful that there is a spectrum of degrees of “competitiveness” or “substitutability” of products in the marketplace, and that it is difficult, if not impossible, in the abstract, to indicate precisely where on this spectrum the word “like” in Article III:4 of the GATT 1994 falls. We are not saying that all products which are in some competitive relationship are “like products” under Article III:4. In ruling on the measure at issue, we also do not attempt to define the precise scope of the word “like” in Article III:4. Nor do we wish to decide if the scope of “like products” in Article III:4 is co-extensive with the combined scope of “like” and “directly competitive or substitutable” products in Article III:2. However, we recognize that the relationship between these two provisions is important, because there is no sharp distinction between fiscal regulation, covered by Article III:2, and non-fiscal regulation, covered by Article III:4. Both forms of regulation can often be used to achieve the same ends. It would be incongruous if, due to a significant difference in the product scope of these two provisions, Members were prevented from using one form of regulation — for instance, fiscal — to protect domestic production of certain products, but were able to use another form of regulation — for instance, non-fiscal — to achieve those ends. This would frustrate a consistent application of the “general principle” in Article III:1. For these reasons, we conclude that the scope of “like” in Article III:4 is broader than the scope of “like” in Article III:2, first sentence. Nonetheless, we note, once more, that Article III:2 extends not only to “like products”, but also to products which are “directly competitive or substitutable”, and that Article III:4 extends only to “like products”. In view of this different language, and although we need not rule, and do not rule, on the precise product scope of Article III:4, we do conclude that the product scope of Article III:4, although broader than the first sentence of Article III:2, is certainly not broader than the combined product scope of the two sentences of Article III:2 of the GATT 1994.
 

N.1.9.3.3 Thailand — Cigarettes (Philippines), Footnote 144 to para. 114
(WT/DS371/AB/R)
 

We note that even if a measure at issue consisted solely of administrative requirements, we do not exclude the possibility that such requirements may have a bearing on the respective tax burdens on imported and like domestic products, and may therefore be subject to Article III:2. Although Thailand may be correct in stating that prior WTO reports have examined measures consisting of “administrative requirements relating to the sale of imported products” under Article III:4 (Thailand’s appellant’s submission, para. 69), this does not in our view demonstrate that, if such requirements subject imported and like domestic products to internal taxes or other internal charges, the same measures, or certain aspects of the same measures, could not also be scrutinized under Article III:2. (See Panel Report, Argentina — Hides and Leather, para. 11.143 (finding that administrative measures concerning the pre-payment of tax “qualify as tax measures [that] fall to be assessed under Article III:2”))
 

N.1.9.4 LIKENESS CRITERIA
 

N.1.9.4.1 EC — Asbestos, paras. 101–102
(WT/DS135/AB/R)
 

… The Report of the Working Party on Border Tax Adjustments outlined an approach for analyzing “likeness” that has been followed and developed since by several panels and the Appellate Body. …
 

These general criteria, or groupings of potentially shared characteristics, provide a framework for analyzing the “likeness” of particular products on a case-by-case basis. These criteria are, it is well to bear in mind, simply tools to assist in the task of sorting and examining the relevant evidence. They are neither a treaty-mandated nor a closed list of criteria that will determine the legal characterization of products. More important, the adoption of a particular framework to aid in the examination of evidence does not dissolve the duty or the need to examine, in each case, all of the pertinent evidence. In addition, although each criterion addresses, in principle, a different aspect of the products involved, which should be examined separately, the different criteria are interrelated. For instance, the physical properties of a product shape and limit the end-uses to which the products can be devoted. Consumer perceptions may similarly influence — modify or even render obsolete — traditional uses of the products. Tariff classification clearly reflects the physical properties of a product.
 

N.1.9.4.2 EC — Asbestos, para. 111
(WT/DS135/AB/R)
 

We believe that physical properties deserve a separate examination that should not be confused with the examination of end-uses. Although not decisive, the extent to which products share common physical properties may be a useful indicator of “likeness”. Furthermore, the physical properties of a product may also influence how the product can be used, consumer attitudes about the product, and tariff classification. It is, therefore, important for a panel to examine fully the physical character of a product. …
 

N.1.9.4.3 EC — Asbestos, para. 114
(WT/DS135/AB/R)
 

Panels must examine fully the physical properties of products. In particular, panels must examine those physical properties of products that are likely to influence the competitive relationship between products in the marketplace. …
 

N.1.9.4.4 EC — Asbestos, paras. 117–118
(WT/DS135/AB/R)
 

Before examining the Panel’s findings under the second and third criteria, we note that these two criteria involve certain of the key elements relating to the competitive relationship between products: first, the extent to which products are capable of performing the same, or similar, functions (end-uses), and, second, the extent to which consumers are willing to use the products to perform these functions (consumers’ tastes and habits). Evidence of this type is of particular importance under Article III of the GATT 1994, precisely because that provision is concerned with competitive relationships in the marketplace. If there is — or could be — no competitive relationship between products, a Member cannot intervene, through internal taxation or regulation, to protect domestic production. Thus, evidence about the extent to which products can serve the same end-uses, and the extent to which consumers are — or would be — willing to choose one product instead of another to perform those end-uses, is highly relevant evidence in assessing the “likeness” of those products under Article III:4 of the GATT 1994.
 

We consider this to be especially so in cases where the evidence relating to properties establishes that the products at issue are physically quite different. In such cases, in order to overcome this indication that products are not “like”, a higher burden is placed on complaining Members to establish that, despite the pronounced physical differences, there is a competitive relationship between the products such that all of the evidence, taken together, demonstrates that the products are “like” under Article III:4 of the GATT 1994. In this case, where it is clear that the fibres have very different properties, in particular, because chrysotile is a known carcinogen, a very heavy burden is placed on Canada to show, under the second and third criteria, that the chrysotile asbestos and PCG fibres are in such a competitive relationship.
 

N.1.9.4.5 EC — Asbestos, para. 119
(WT/DS135/AB/R)
 

… the Panel stated that “[i]t suffices that, for a given utilization, the properties are the same to the extent that one product can replace the other” (emphasis added). Although we agree that it is certainly relevant that products have similar end-uses for a “small number of … applications”, or even for a “given utilization”, we think that a panel must also examine the other, different end-uses for products. It is only by forming a complete picture of the various end-uses of a product that a panel can assess the significance of the fact that products share a limited number of end-uses. In this case, the Panel did not provide such a complete picture of the various end-uses of the different fibres. The Panel did not explain, or elaborate in any way on, the “small number of … applications” for which the various fibres have similar end-uses. Nor did the Panel examine the end-uses for these products which were not similar. …
 

N.1.9.4.6 EC — Asbestos, para. 120
(WT/DS135/AB/R)
 

… There will be few situations where the evidence on the “likeness” of products will lend itself to “clear results”. In many cases, the evidence will give conflicting indications, possibly within each of the four criteria. For instance, there may be some evidence of similar physical properties and some evidence of differing physical properties. Or the physical properties may differ completely, yet there may be strong evidence of similar end-uses and a high degree of substitutability of the products from the perspective of the consumer. A panel cannot decline to inquire into relevant evidence simply because it suspects that evidence may not be “clear” or, for that matter, because the parties agree that certain evidence is not relevant. …
 

N.1.9.4.7 EC — Asbestos, para. 121
(WT/DS135/AB/R)
 

Furthermore, in a case such as this, where the fibres are physically very different, a panel cannot conclude that they are “like products” if it does not examine evidence relating to consumers’ tastes and habits. In such a situation, if there is no inquiry into this aspect of the nature and extent of the competitive relationship between the products, there is no basis for overcoming the inference, drawn from the different physical properties of the products, that the products are not “like”.
 

N.1.9.4.8 EC — Asbestos, para. 138
(WT/DS135/AB/R)
 

… Where products have a wide range of end-uses, only some of which overlap, we do not believe that it is sufficient to rely solely on evidence regarding the overlapping end-uses, without also examining evidence of the nature and importance of these end-uses in relation to all of the other possible end-uses for the products. In the absence of such evidence, we cannot determine the significance of the fact that chrysotile asbestos and PCG fibres share a small number of similar end-uses.
 

N.1.9.5 EVIDENCE
 

N.1.9.5.1 EC — Asbestos, para. 103
(WT/DS135/AB/R)
 

The kind of evidence to be examined in assessing the “likeness” of products will, necessarily, depend upon the particular products and the legal provision at issue. When all the relevant evidence has been examined, panels must determine whether that evidence, as a whole, indicates that the products in question are “like” in terms of the legal provision at issue. We have noted that, under Article III:4 of the GATT 1994, the term “like products” is concerned with competitive relationships between and among products. Accordingly, whether the Border Tax Adjustments framework is adopted or not, it is important under Article III:4 to take account of evidence which indicates whether, and to what extent, the products involved are — or could be — in a competitive relationship in the marketplace.
 

N.1.9.5.2 EC — Asbestos, para. 113
(WT/DS135/AB/R)
 

… we note that neither the text of Article III:4 nor the practice of panels and the Appellate Body suggest that any evidence should be excluded a priori from a panel’s examination of “likeness”. Moreover, as we have said, in examining the “likeness” of products, panels must evaluate all of the relevant evidence. We are very much of the view that evidence relating to the health risks associated with a product may be pertinent in an examination of “likeness” under Article III:4 of the GATT 1994. We do not, however, consider that the evidence relating to the health risks associated with chrysotile asbestos fibres need be examined under a separate criterion, because we believe that this evidence can be evaluated under the existing criteria of physical properties, and of consumers’ tastes and habits, to which we will come below.
 

N.1.10 Article III:4 of the GATT 1994 — “affecting”     back to top

N.1.10.1 EC — Bananas III, para. 211
(WT/DS27/AB/R)
 

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. … 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. …
 

N.1.10.2 US — FSC (Article 21.5 — EC), paras. 208–210
(WT/DS108/AB/RW)
 

… the word “affecting” assists in defining the types of measure that must conform to the obligation not to accord “less favourable treatment” to like imported products, which is set out in Article III:4.
 

The word “affecting” serves a similar function in Article I:1 of the General Agreement on Trade in Services (the “GATS”), where it also defines the types of measure that are subject to the disciplines set forth elsewhere in the GATS but does not, in itself, impose any obligation. …
 

In view of the similar function of the identical word, “affecting”, in Article III:4 of the GATT 1994, we also interpret this word, in this provision, as having a “broad scope of application”.
 

N.1.10.3 China — Auto Parts, paras. 194–195
(WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R)
 

… We recall that the Appellate Body determined that a 50 per cent “fair market value” rule under the measure at issue in [US — FSC (Article 21.5 — EC)] “affected” the internal use of imported products because it created an incentive for a manufacturer not to use imported input products. Similarly, the Panel in India — Autos found that “indigenization requirements” (requirements to use a minimum amount of domestically produced parts) and “trade balancing requirements” (requirements to export products of an equivalent value to the imported products) created incentives for automobile manufacturers to purchase Indian parts and components rather than imported parts and components and, thereby, “affected” the internal sale, offering for sale, purchase and use of imported parts and components in the Indian market within the meaning of Article III:4 of the GATT 1994. That panel also observed that “[t]he fact that a provision is not necessarily primarily aimed at regulating the offering for sale or use of the product on the domestic market is … not an obstacle to its ‘affecting’ them”.
 

Returning to the circumstances of this case, we note that the measures at issue set out specific thresholds for determining when imported auto parts will be characterized as complete vehicles. The use by an automobile manufacturer, in a given vehicle model, of certain key assemblies or combinations of assemblies that are imported means that a higher (25 per cent) charge will be payable on all imported parts than would be the case if those combinations of imported assemblies were not used and the thresholds were not met, in which case any imported parts used in the vehicle model would be subject to only a 10 per cent duty. This creates an incentive for manufacturers to limit their use of imported parts relative to domestic parts. In addition, the measures at issue in this dispute impose administrative procedures, and associated delays, on automobile manufacturers using imported parts, which could be avoided entirely if a manufacturer were to use exclusively domestic auto parts. These incentives “affect” the conditions of competition for imported auto parts on the Chinese internal market.
 

N.1.11 Article III:4 of the GATT 1994 — “less favourable treatment”. See also MFN Treatment (M.2); National Treatment, Article XVII of the GATS (N.1.13); National Treatment, Article 3.1 of the TRIPS Agreement (N.1.14); TBT Agreement, Article 2.1 — MFN and national treatment obligations, “treatment no less favourable” (T.4.2A.5)     back to top

N.1.11.1 EC — Bananas III, paras. 213–214
(WT/DS27/AB/R)
 

… the practice of issuing hurricane licences constitutes an incentive for operators to market EC bananas to the exclusion of third-country and non-traditional ACP bananas. This practice therefore affects the competitive conditions in the market in favour of EC bananas. …
 

… we agree with the Panel that the EC practice of issuing hurricane licences is inconsistent with Article III:4 of the GATT 1994.
 

N.1.11.2 EC — Bananas III, para. 216
(WT/DS27/AB/R)
 

… we stated that “Article III:1 articulates a general principle” which “informs the rest of Article III”. However, we also said in that Report that Article III:1 “informs the first sentence and the second sentence of Article III:2 in different ways”. With respect to Article III:2, first sentence, we noted that it does not refer specifically to Article III:1. … Article III:4 does not specifically refer to Article III:1. Therefore, a determination of whether there has been a violation of Article III:4 does not require a separate consideration of whether a measure “afford[s] protection to domestic production”.
 

N.1.11.3 Korea — Various Measures on Beef, para. 137
(WT/DS161/AB/R, WT/DS169/AB/R)
 

A formal difference in treatment between imported and like domestic products is thus neither necessary, nor sufficient, to show a violation of Article III:4. Whether or not imported products are treated “less favourably” than like domestic products should be assessed instead by examining whether a measure modifies the conditions of competition in the relevant market to the detriment of imported products.
 

N.1.11.4 Korea — Various Measures on Beef, para. 144
(WT/DS161/AB/R, WT/DS169/AB/R)
 

… the Korean measure formally separates the selling of imported beef and domestic beef. However, that formal separation, in and of itself, does not necessarily compel the conclusion that the treatment thus accorded to imported beef is less favourable than the treatment accorded to domestic beef. To determine whether the treatment given to imported beef is less favourable than that given to domestic beef, we must, as earlier indicated, inquire into whether or not the Korean dual retail system for beef modifies the conditions of competition in the Korean beef market to the disadvantage of the imported product.
 

N.1.11.5 Korea — Various Measures on Beef, para. 149
(WT/DS161/AB/R, WT/DS169/AB/R)
 

… We are not holding that a dual or parallel distribution system that is not imposed directly or indirectly by law or governmental regulation, but is rather solely the result of private entrepreneurs acting on their own calculations of comparative costs and benefits of differentiated distribution systems, is unlawful under Article III:4 of the GATT 1994. …
 

N.1.11.6 Korea — Various Measures on Beef, paras. 150–151
(WT/DS161/AB/R, WT/DS169/AB/R)
 

… Korea requires that imported beef be sold in a store displaying a sign declaring “Specialized Imported Beef Store”. …
 

Without a system of specialized imported beef stores, the sign requirement would have no meaning and would not be required. When considered independently from a dual retail system, a sign requirement might or might not be characterized legally as consistent with Article III:4 of the GATT 1994. …
 

N.1.11.7 EC — Asbestos, para. 100
(WT/DS135/AB/R)
 

We recognize that, by interpreting the term “like products” in Article III:4 in this way, we give that provision a relatively broad product scope — although no broader than the product scope of Article III:2. In so doing, we observe that there is a second element that must be established before a measure can be held to be inconsistent with Article III:4. Thus, even if two products are “like”, that does not mean that a measure is inconsistent with Article III:4. A complaining Member must still establish that the measure accords to the group of “like” imported products “less favourable treatment” than it accords to the group of “like” domestic products. The term “less favourable treatment” expresses the general principle, in Article III:1, that internal regulations “should not be applied … so as to afford protection to domestic production”. If there is “less favourable treatment” of the group of “like” imported products, there is, conversely, “protection” of the group of “like” domestic products. However, a Member may draw distinctions between products which have been found to be “like”, without, for this reason alone, according to the group of “like” imported products “less favourable treatment” than that accorded to the group of “like” domestic products. In this case, we do not examine further the interpretation of the term “treatment no less favourable” in Article III:4, as the Panel’s findings on this issue have not been appealed or, indeed, argued before us.
 

N.1.11.8 US — FSC (Article 21.5 — EC), para. 215
(WT/DS108/AB/RW)
 

The examination of whether a measure involves “less favourable treatment” of imported products within the meaning of Article III:4 of the GATT 1994 must be grounded in close scrutiny of the “fundamental thrust and effect of the measure itself”. This examination cannot rest on simple assertion, but must be founded on a careful analysis of the contested measure and of its implications in the marketplace. At the same time, however, the examination need not be based on the actual effects of the contested measure in the marketplace.
 

N.1.11.9 US — FSC (Article 21.5 — EC), para. 221
(WT/DS108/AB/RW)
 

In our view, the above conclusion is not nullified by the fact that the fair market value rule will not give rise to less favourable treatment for like imported products in each and every case. …
 

N.1.11.10 Dominican Republic — Import and Sale of Cigarettes, para. 96
(WT/DS302/AB/R)
 

Nor do we accept Honduras’ argument that the bond requirement accords “less favourable treatment” to imported cigarettes because, as the sales of domestic cigarettes are greater than those of imported cigarettes on the Dominican Republic market, the per-unit cost of the bond requirement for imported cigarettes is higher than for domestic products. The Appellate Body indicated in Korea — Various Measures on Beef that imported products are treated less favourably than like products if a measure modifies the conditions of competition in the relevant market to the detriment of imported products. However, the existence of a detrimental effect on a given imported product resulting from a measure does not necessarily imply that this measure accords less favourable treatment to imports if the detrimental effect is explained by factors or circumstances unrelated to the foreign origin of the product, such as the market share of the importer in this case. In this specific case, the mere demonstration that the per-unit cost of the bond requirement for imported cigarettes was higher than for some domestic cigarettes during a particular period is not, in our view, sufficient to establish “less favourable treatment” under Article III:4 of the GATT 1994. Indeed, the difference between the per-unit costs of the bond requirement alleged by Honduras is explained by the fact that the importer of Honduran cigarettes has a smaller market share than two domestic producers (the per-unit cost of the bond requirement being the result of dividing the cost of the bond by the number of cigarettes sold on the Dominican Republic market). In this case, the difference between the per-unit costs of the bond requirement alleged by Honduras does not depend on the foreign origin of the imported cigarettes. Therefore, in our view, the Panel was correct in dismissing the argument that the bond requirement accords less favourable treatment to imported cigarettes because the per-unit cost of the bond was higher for the importer of Honduran cigarettes than for two domestic producers.
 

N.1.11.11 Thailand — Cigarettes (Philippines), para. 126
(WT/DS371/AB/R)
 

Article III:4 forms part of the broader framework set out in Article III, which ensures that Members provide equality of competitive conditions for imported products in relation to domestic products. Like the other paragraphs of Article III, the obligation prescribed under Article III:4 is informed by the general principle set out in Article III:1 that internal measures should not be applied so as to afford protection to domestic production. In the context of Article III:4, this means that, where there is less favourable treatment of imported products, there is protection to domestic production.
 

N.1.11.12 Thailand — Cigarettes (Philippines), paras. 128–130
(WT/DS371/AB/R)
 

… the mere fact that a Member draws regulatory distinctions between imported and like domestic products is, in itself, not determinative of whether imported products are treated less favourably within the meaning of Article III:4. Rather, what is relevant is whether such regulatory differences distort the conditions of competition to the detriment of imported products. If so, then the differential treatment will amount to treatment that is “less favourable” within the meaning of Article III:4.
 

The analysis of whether imported products are accorded less favourable treatment requires a careful examination “grounded in close scrutiny of the ‘fundamental thrust and effect of the measure itself’”, including of the implications of the measure for the conditions of competition between imported and like domestic products. This analysis need not be based on empirical evidence as to the actual effects of the measure at issue in the internal market of the Member concerned. Of course, nothing precludes a panel from taking such evidence of actual effects into account.
 

The implications of the contested measure for the equality of competitive conditions are, first and foremost, those that are discernible from the design, structure, and expected operation of the measure. For instance, where a Member’s legal system applies a single regulatory regime to both imported and like domestic products, with the sole difference being that an additional requirement is imposed only on imported products, the existence of this additional requirement may provide a significant indication that imported products are treated less favourably. Because, however, the examination of whether imported products are treated less favourably “cannot rest on simple assertion”, close scrutiny of the measure at issue will normally require further identification or elaboration of its implications for the conditions of competition in order properly to support a finding of less favourable treatment under Article III:4 of the GATT 1994.
 

N.1.11.13 Thailand — Cigarettes (Philippines), para. 133
(WT/DS371/AB/R)
 

… the regulatory “differences” at issue stem from the fact that resellers of imported cigarettes must comply with the additional administrative requirements, whereas resellers of domestic cigarettes are exempt from such requirements. Thus, in this dispute, the sole difference in regulatory treatment consists of requirements applied only to imported cigarettes. The uncontested fact that resellers of imported cigarettes are subject to certain administrative requirements, whereas resellers of like domestic cigarettes are not, itself provides a significant indication that imported cigarettes are accorded less favourable treatment.
 

N.1.11.14 Thailand — Cigarettes (Philippines), para. 134
(WT/DS371/AB/R)
 

… In our view, … an analysis of less favourable treatment should not be anchored in an assessment of the degree of likelihood that an adverse impact on competitive conditions will materialize. Rather, an analysis under Article III:4 must begin with careful scrutiny of the measure, including consideration of the design, structure, and expected operation of the measure at issue. Such scrutiny may well involve — but does not require — an assessment of the contested measure in the light of evidence regarding the actual effects of that measure in the market. In any event, there must be in every case a genuine relationship between the measure at issue and its adverse impact on competitive opportunities for imported versus like domestic products to support a finding that imported products are treated less favourably.
 

N.1.11.15 Thailand — Cigarettes (Philippines), para. 138
(WT/DS371/AB/R)
 

… The Panel assessed certain implications of these measures in the Thai market by referring to econometric evidence indicating a close competitive relationship, and also by noting that the additional administrative requirements carry certain operating costs. We note that, although the Panel could have inquired further into the implications of Thailand’s measure for the conditions of competition, the mere fact that the additional administrative requirements are imposed on imported cigarettes, and not on like domestic cigarettes, provides, in itself, a significant indication that the conditions of competition are adversely modified to the detriment of imported cigarettes. We therefore consider that the Panel’s analysis was sufficient to support its finding that the additional administrative requirements modify the conditions of competition to the detriment of imported cigarettes.
 

N.1.11.16 Thailand — Cigarettes (Philippines), para. 139 and Footnote 207
(WT/DS371/AB/R)
 

… we do not see any basis for Thailand’s contention on appeal that [the Panel failed to address Thailand’s argument that resellers of imported cigarettes gain certain “financial advantages” by virtue of the additional administrative requirements].207
 

N.1.11.17 US — Clove Cigarettes, Footnote 372 to para. 179
(WT/DS406/AB/R)
 

We disagree with the United States to the extent that it suggests that Dominican Republic — Import and Sale of Cigarettes stands for the proposition that, under Article III:4, panels should inquire further whether “the detrimental effect is unrelated to the foreign origin of the product”. … Although the statement referred to by the United States, when read in isolation, could be viewed as suggesting that further inquiry into the rationale for the detrimental impact is necessary … . … in that dispute, the Appellate Body merely held that the higher per unit costs of the bond requirement for imported cigarettes did not conclusively demonstrate less favourable treatment, because it was not attributable to the specific measure at issue but, rather, was a function of sales volumes. In Thailand — Cigarettes (Philippines), the Appellate Body further clarified that for a finding of less favourable treatment under Article III:4 “there must be in every case a genuine relationship between the measure at issue and its adverse impact on competitive opportunities for imported versus like domestic products to support a finding that imported products are treated less favourably”. … The Appellate Body eschewed an additional inquiry as to whether such detrimental impact was related to the foreign origin of the products or explained by other factors or circumstances.
 

N.1.11A Article III:8 of the GATT 1994 — Derogations from the National Treatment Obligation. See also SCM Agreement, Relationship between the SCM Agreement and the GATT 1994 (S.2.41); SCM Agreement, Relationship between the SCM Agreement and the TRIMs Agreement (S.2.45); TRIMs Agreement (T.8A)     back to top

N.1.11A.1 ARTICLE III:8(A) — GOVERNMENT PROCUREMENT
 

N.1.11A.1.1 Canada — Renewable Energy / Canada — Feed-in Tariff Program, paras. 5.55–5.56
(WT/DS412/AB/R, WT/DS426/AB/R)
 

… Article III:8(a) begins with the words “The provisions of this Article shall not apply to …”. This introductory clause establishes a linkage with the remainder of Article III. The title of Article III is “National Treatment on Internal Taxation and Regulation”. The national treatment principle enshrined in Article III has been a cornerstone of the multilateral trading system since its inception. This general principle, which is articulated in the first paragraph of Article III, postulates that internal measures “should not be applied … so as to afford protection to domestic production”. Other paragraphs of Article III “constitute specific expressions” of this “overarching, ‘general principle’”.
 

The opening clause of Article III:8(a) uses the term “apply” in the negative, thus precluding the application of the other provisions of Article III to measures that meet the requirements of that paragraph. Article III:8(a) therefore establishes a derogation from the national treatment obligation of Article III for government procurement activities falling within its scope. Measures satisfying the requirements of Article III:8(a) are not subject to the national treatment obligations set out in other paragraphs of Article III. Article III:8(a) is a derogation limiting the scope of the national treatment obligation and it is not a justification for measures that would otherwise be inconsistent with that obligation. At the same time, we note that the characterization of the provision as a derogation does not pre-determine the question as to which party bears the burden of proof with regard to the requirements stipulated in the provision.
 

N.1.11A.1.2 Canada — Renewable Energy / Canada — Feed-in Tariff Program, para. 5.57
(WT/DS412/AB/R, WT/DS426/AB/R)
 

Article III:8(a) contains several elements describing the types and the content of measures falling within the ambit of the provision. … We consider that Article III:8(a) should be interpreted holistically. This requires consideration of the linkages between the different terms used in the provision and the contextual connections to other parts of Article III, as well as to other provisions of the GATT 1994. At the same time, the principle of effective treaty interpretation requires us to give meaning to every term of the provision.
 

N.1.11A.1.3 Canada — Renewable Energy / Canada — Feed-in Tariff Program, para. 5.58
(WT/DS412/AB/R, WT/DS426/AB/R)
 

Article III:8(a) describes the types of measures falling within its ambit as “laws, regulations or requirements governing the procurement by governmental agencies of products purchased”. We note that the word “governing” links the words “laws, regulations or requirements” to the word “procurement” and the remainder of the paragraph. In the context of Article III:8(a), the word “governing”, along with the word “procurement” and the other parts of the paragraph, define the subject matter of the “laws, regulations or requirements”. The word “governing” is defined as “constitut[ing] a law or rule for”. Article III:8(a) thus requires an articulated connection between the laws, regulations, or requirements and the procurement, in the sense that the act of procurement is undertaken within a binding structure of laws, regulations, or requirements.
 

N.1.11A.1.4 Canada — Renewable Energy / Canada — Feed-in Tariff Program, para. 5.59
(WT/DS412/AB/R, WT/DS426/AB/R)
 

The term “procurement” may refer generally to “[t]he action of obtaining something; acquisition”, or it may refer more specifically to “the action or process of obtaining equipment and supplies”. In a more technical sense, procurement usually refers to formal procedures used by governments to acquire goods or services. In Article III:8(a), the word “procurement” is related to the words “products purchased”. In this respect, the Panel found that the term “procurement” in Article III:8(a) should be given the “same essential meaning” as the word “purchased” and vice versa. However, in our view, the concepts of “procurement” and “purchase” are not to be equated. As we see it, “procurement” is the operative word in Article III:8(a) describing the process and conduct of the governmental agency. The word “purchased” is used to describe the type of transaction used to put into effect that procurement. Not every procurement needs to be effectuated by way of a purchase, and not every purchase is part of a process of government procurement. The use of the word “purchased” in the same provision suggests reading the word “procurement” as referring to the process of obtaining products, rather than as referring to an acquisition itself, because, if procurement was understood to refer simply to any acquisition, it would not add any meaning to Article III:8(a) in addition to what is already expressed by the word “purchased”. We therefore understand the word “procurement” to refer to the process pursuant to which a government acquires products. The precise range of contractual arrangements that are encompassed by the concept of “purchase” is not a matter we need to decide in this case.
 

N.1.11A.1.5 Canada — Renewable Energy / Canada — Feed-in Tariff Program, paras. 5.60–5.61
(WT/DS412/AB/R, WT/DS426/AB/R)
 

Article III:8 further specifies what is procured and by whom. The subject matter of the procurement is a “product”, and it is being procured by a “governmental agency”. The term “agency” is defined as “[a] business, body, or organization providing a particular service, or negotiating transactions on behalf of a person or group”. The word “agency” is used in connection with the word “governmental” and, accordingly, Article III:8(a) refers to entities acting for or on behalf of government. The Appellate Body has held that the meaning of “government” is derived, in part, from the functions that it performs and, in part, from the authority under which it performs those functions. We therefore consider that the question of whether an entity is a “governmental agency”, in the sense of Article III:8(a), is determined by the competences conferred on the entity concerned and by whether that entity acts for or on behalf of government.
 

We consider that Articles XVII:1 and XVII:2 of the GATT 1994 provide relevant context for the interpretation of the term “governmental agency” in Article III:8(a). Article XVII:1 stipulates obligations for state trading enterprises and Article XVII:2 sets out a derogation from those obligations for certain government procurement transactions. In contrast to Article III:8(a), the provisions of Article XVII relate to “state trading enterprises” and not to “governmental agencies”. According to Article XVII:1, this includes state enterprises and enterprises that are conferred exclusive or special privileges from the state. It follows that the GATT 1994 recognizes that there is a public and a private realm, and that government entities may act in one, the other, or both. Governments may limit the actions of entities to the public realm or give entities competences to act in the private realm. In our view, the term “governmental agencies” refers to those entities acting for or on behalf of government in the public realm within the competences that have been conferred on them to discharge governmental functions. This further confirms our understanding that a “governmental agency” is an entity acting for or on behalf of government and performing governmental functions within the competences conferred on it.
 

N.1.11A.1.6 Canada — Renewable Energy / Canada — Feed-in Tariff Program, paras. 5.62–5.63 and Footnotes 499–500
(WT/DS412/AB/R, WT/DS426/AB/R)
 

We turn next to the term “products purchased” within the meaning of Article III:8(a). A “product” in the sense of this provision is something that is capable of being traded. The term “product” is also found in other provisions of Article III of the GATT 1994 that provide relevant context. Paragraphs 2 and 4, in particular, focus on the treatment accorded to “products”. Article III:4 prohibits discrimination against imported products, that is, it prohibits a Member from treating imported products less favourably than like products of national origin. In the context of Article III:2, the national treatment obligation applies also to the treatment of imported products that are directly competitive to or substitutable with domestic products.
 

We have found above that Article III:8(a) stipulates conditions under which derogation from the obligations in Article III takes place. The derogation in Article III:8(a) becomes relevant only if there is discriminatory treatment of foreign products that are covered by the obligations in Article III, and this discriminatory treatment results from laws, regulations, or requirements governing procurement by governmental agencies of products purchased. Both the obligations in Article III and the derogation in Article III:8(a) refer to discriminatory treatment of products. Because Article III:8(a) is a derogation from the obligations contained in other paragraphs of Article III, we consider that the same discriminatory treatment must be considered both with respect to the obligations of Article III and with respect to the derogation of Article III:8(a). Accordingly, the scope of the terms “products purchased” in Article III:8(a) is informed by the scope of “products” referred to in the obligations set out in other paragraphs of Article III. Article III:8(a) thus concerns, in the first instance, the product that is subject to the discrimination. The coverage of Article III:8 extends not only to products that are identical to the product that is purchased, but also to “like” products. In accordance with the Ad Note to Article III:2, it also extends to products that are directly competitive to or substitutable with the product purchased under the challenged measure. For convenience, this range of products can be described as products that are in a competitive relationship. What constitutes a competitive relationship between products may require consideration of inputs and processes of production used to produce the product. In its rebuttal of Canada’s claim under Article III:8(a), the European Union acknowledges that the cover of Article III:8(a) may also extend to discrimination relating to inputs and processes of production used in respect of products purchased by way of procurement.499 Whether the derogation in Article III:8(a) can extend also to discrimination of the kind referred to by the European Union is a matter we do not decide in this case.500
 

N.1.11A.1.7 Canada — Renewable Energy / Canada — Feed-in Tariff Program, paras. 5.64, 5.66–5.68
(WT/DS412/AB/R, WT/DS426/AB/R)
 

We now turn to the next element of Article III:8(a). The provision refers to purchases “for governmental purposes”. …
 

...
 

The word “purpose” may refer to “an object in view; a determined intention or aim” or it may refer to “the end to which an object or action is directed”. In Article III:8(a), the word “purpose” is used in conjunction with the word “governmental”. Accordingly, the term “governmental purposes” may refer either to the intentions or aims of a government, or it may refer to government as the end to which the product purchased is directed. We note that in Article III:8(a) the word “governmental” is used once in connection with “purposes”, and again in connection with the word “agencies”. The reference to “governmental agencies” defines the identity of the entity carrying out the procurement. Yet, because governmental agencies by their very nature pursue governmental aims or objectives, the additional reference to “governmental” in relation to “purposes” must go beyond simply requiring some governmental aim or objective with respect to purchases by governmental agencies.
 

We further note that the French version of Article III:8(a) refers to “les besoins des pouvoirs publics” and the Spanish version of the provision refers to “las necesidades de los poderes públicos”. The term “purposes” thus corresponds to the terms “besoins” and “necesidades”, respectively, in the French and the Spanish texts. Both the French and the Spanish terms correspond closely to the English term “needs”. As such, the French and the Spanish text can be read harmoniously with an interpretation of the word “purposes” in English as referring to purchases of products directed at the government or purchased for the needs of the government in the discharge of its functions. By contrast, the words “besoins” or “necesidades” cannot be read harmoniously with the definition of the term “purpose” as “objectives” or “aims” of the government, because neither the word “besoins” in French, not the word “necesidades” in Spanish encompasses the notion of an aim or objective.
 

Article XVII:2 of the GATT 1994 provides relevant context for the interpretation of the words “governmental purposes” in Article III:8(a). The provision refers to “imports of products for immediate or ultimate consumption in governmental use”. By referring to immediate and ultimate consumption in governmental use, Article XVII:2 identifies instances in which a product may be said to be purchased for governmental purposes. An obvious example is where a governmental agency purchases a good, uses it to discharge its governmental functions, and the good is totally consumed in the process. None of the participants disputes that this would constitute an example of a good purchased for governmental purposes. We also note that Article XVII:2 is phrased more narrowly than Article III:8(a), as the former provision refers to “immediate or ultimate consumption in governmental use”. This in turn suggests that, where products purchased are consumed in governmental use, Article III:8(a) does not require that this be “immediate or ultimate”. Therefore, we are of the view that the phrase “products purchased for governmental purposes” in Article III:8(a) refers to what is consumed by government or what is provided by government to recipients in the discharge of its public functions. The scope of these functions is to be determined on a case by case basis. Finally, we recall that Article III:8(a) refers to purchases “for governmental purposes”. The word “for” relates the term “products purchased” to “governmental purposes”, and thus indicates that the products purchased must be intended to be directed at the government or be used for governmental purposes. Thus, Article III:8(a) requires that there be a rational relationship between the product and the governmental function being discharged.
 

N.1.11A.1.8 Canada — Renewable Energy / Canada — Feed-in Tariff Program, paras. 5.69–5.71
(WT/DS412/AB/R, WT/DS426/AB/R)
 

We turn next to the analysis of the last element of the text of Article III:8(a), namely, the phrase “and not with a view to commercial resale or with a view to use in the production of goods for commercial sale”. In the context of Article III:8(a), the words “with a view to commercial resale” relate back to the “products purchased” and thus attach to the same textual element as the clause “for governmental purposes”. Both the terms “for governmental purposes” and “not with a view to commercial resale” further qualify and limit the scope of “products purchased”. These two requirements are linked by the words “and not”, which suggests that the requirement of purchases not being made with a view to commercial resale must be met in addition to the requirement of purchases being made for governmental purposes. Accordingly, a purchase that does not fulfil the requirement of being made “for governmental purposes” will not be covered by Article III:8(a) regardless of whether it complies with the requirement of being made “not with a view to commercial resale”. These are cumulative requirements. We therefore disagree with the Panel’s proposition that where a government purchase of goods is made “with a view to commercial resale”, it is for that reason also not a purchase “for governmental purposes”.
 

Turning then to the meaning of the words “commercial resale”, we note that the term “resale” is defined as the “sale of something previously bought”. In the context of Article III:8(a), the word “resale” refers to the term “products purchased”. Accordingly, the product not to be “resold” on a commercial basis is the product “purchased for governmental purposes”. As we see it, “commercial resale” is a resale of a product at arm’s length between a willing seller and a willing buyer. Much of the debate in this case has focused on whether procurement “with a view to commercial resale” must involve profit. Canada, in particular, has argued that procurement “with a view to commercial resale” is procurement “with the aim to resell for profit”. Japan and the European Union reject the proposition that profit, or an intent to profit, is a required element. Although the Panel ultimately found the existence of profit in this case, it seemed unpersuaded by Canada’s argument that a profit element is required for a resale to be “commercial”. The Panel observed, in this regard, that “it is a fact that loss-making sales can be, and often are, a part of ordinary commercial activity”.
 

As we see it, whether a transaction constitutes a “commercial resale” must be assessed having regard to the entire transaction. In doing so, the assessment must look at the transaction from the seller’s perspective and at whether the transaction is oriented at generating a profit for the seller. We see profit-orientation generally as an indication that a resale is at arm’s length. Profit-orientation indicates that the seller is acting in a self-interested manner. Yet, as the Panel noted, there are circumstances where a seller enters into a transaction out of his or her own interest without making a profit. There are different circumstances in which a seller may offer a product at a price that does not allow him or her to make a profit, or sometimes even fully to recoup cost. In such circumstances, it may be useful to look at the seller’s long-term strategy. This is because loss-making sales could not be sustained indefinitely and a rational seller would be expected to be profit-oriented in the long term, though we accept that strategies can vary widely and thus do not see this as applying axiomatically. The transaction must also be assessed from the perspective of the buyer. A commercial resale would be one in which the buyer seeks to maximize his or her own interest. It is an assessment of the relationship between the seller and the buyer in the transaction in question that allows a judgement to be made whether a transaction is made at arm’s length.
 

N.1.11A.1.9 Canada — Renewable Energy / Canada — Feed-in Tariff Program, paras. 5.72–5.73
(WT/DS412/AB/R, WT/DS426/AB/R)
 

Finally, we turn to the clause “not … with a view to use in the production of goods for commercial sale” in Article III:8(a). Where the provision uses the same words as in the phrase “not with a view to commercial resale”, we consider that these words have the same meaning in both clauses. Furthermore, while the penultimate clause of Article III:8(a) refers to commercial “resale”, the last clause refers simply to “sale”. To us, this is due to the fact that the penultimate clause addresses the sale of the product previously bought by the governmental agency and the last clause addresses the sale of a product that is different from the product previously bought by the government. However, we consider that both clauses refer essentially to the same type of sales transactions.
 

The provision further refers to “use in the production of goods”. The word “use” is defined as “[t]he act of putting something to work, or employing or applying a thing, for any (esp. a beneficial or productive) purpose”. The relevant purpose in the sense of the provision is then specified by the words “in the production of goods”. The preposition “in” expresses a relation of inclusion and thus suggests that the product has a role in the production of goods. Finally, we note that the clause “not with a view to commercial resale” and the clause “with a view to use in the production of goods for commercial sale” are connected with the word “or”, which suggests that the provision covers only products that are neither purchased with a view to commercial resale, nor purchased with a view to use in the production of goods for commercial sale.
 

N.1.11A.1.10 Canada — Renewable Energy / Canada — Feed-in Tariff Program, para. 5.74
(WT/DS412/AB/R, WT/DS426/AB/R)
 

In sum, we consider that Article III:8(a) sets out a derogation from the national treatment obligation contained in Article III of the GATT 1994. The provision exempts from the national treatment obligation certain measures containing rules for the process by which government purchases products. Under Article III:8(a), the entity procuring products for the government is a “governmental agency”. We have found above that a “governmental agency” is an entity performing functions of government and acting for or on behalf of government. Furthermore, we have found that the derogation of Article III:8(a) must be understood in relation to the obligations stipulated in Article III. This means that the product of foreign origin must be in a competitive relationship with the product purchased. Furthermore, Article III:8(a) is limited to products purchased for the use of government, consumed by government, or provided by government to recipients in the discharge of its public functions. On the contrary, Article III:8(a) does not cover purchases made by governmental agencies with a view to reselling the purchased products in an arm’s-length sale and it does not cover purchases made with a view to using the product previously purchased in the production of goods for sale at arm’s length.
 

N.1.11A.1.11 Canada — Renewable Energy / Canada — Feed-in Tariff Program, paras. 5.75–5.76, 5.78–5.79
(WT/DS412/AB/R, WT/DS426/AB/R)
 

… We note that the product that is subject to the Minimum Required Domestic Content Levels of the FIT Programme and Contracts challenged by the complainants as discriminatory under Article III:4 of the GATT 1994 and the TRIMs Agreement is certain renewable energy generation equipment. The product purchased by the Government of Ontario under the FIT Programme and Contracts, however, is electricity and not generation equipment. … Accordingly, the product being purchased by a governmental agency for purposes of Article III:8(a) — namely, electricity — is not the same as the product that is treated less favourably as a result of the Minimum Required Domestic Content Levels of the FIT Programme and Contracts.
 

… the Panel found that, in the present case, purchases of electricity nonetheless fall within the scope of the derogation of Article III:8(a), because the generation equipment “is needed and used” to produce the electricity, and therefore there is a “close relationship” between the products affected by the domestic content requirements (generation equipment) and the product procured (electricity).
 

...
 

We recall our finding above that laws, regulations, or requirements “governing” procurement must articulate a connection between those legal instruments and procurement in the sense that the act of procurement is taken within a binding structure of laws, regulations, or requirements. We acknowledge that, under the challenged measures, a connection is articulated between the procurement of electricity and the Minimum Required Domestic Content Levels regarding generation equipment. However, in our view, this connection under municipal law is not dispositive of the issue, because Article III:8(a) imposes also other conditions.
 

We have found above that the conditions for derogation under Article III:8(a) must be understood in relation to the obligations stipulated in the other paragraphs of Article III. This means that the product of foreign origin allegedly being discriminated against must be in a competitive relationship with the product purchased. In the case before us, the product being procured is electricity, whereas the product discriminated against for reason of its origin is generation equipment. These two products are not in a competitive relationship. … Accordingly, the discrimination relating to generation equipment contained in the FIT Programme and Contracts is not covered by the derogation of Article III:8(a) of the GATT 1994. We therefore reverse the Panel’s findings. … Instead, we find that the Minimum Required Domestic Content Levels cannot be characterized as “laws, regulations or requirements governing the procurement by governmental agencies” of electricity within the meaning of Article III:8(a) of the GATT 1994.
 

N.1.11A.1.12 Canada — Renewable Energy / Canada — Feed-in Tariff Program, paras. 5.80–5.84
(WT/DS412/AB/R, WT/DS426/AB/R)
 

… Japan claims that the Panel erred in finding that the Government of Ontario’s purchases of electricity under the FIT Programme constitute “procurement” within the meaning of Article III:8(a) …
 

… Japan and the European Union conditionally appeal the Panel’s interpretation and application of the term “for governmental purposes”. Japan conditionally appeals the Panel’s interpretation and application of the term “commercial resale”.
 

We have addressed the various elements of Article III:8(a) to which the claims of Japan and the European Union relate in a holistic interpretation of this provision set out above. Having found that the Minimum Required Domestic Content Levels do not fall within the ambit of the derogation in Article III:8(a), we need not address these further allegations of error raised by the European Union and Japan seeking reversal of intermediate findings by the Panel. These findings are moot.
 

Canada claims that the Panel erred in finding that the Government of Ontario’s purchases of electricity under the FIT Programme are undertaken “with a view to commercial resale”. …
 

Our conclusion that the measures at issue are not covered by Article III:8(a) of the GATT 1994 is not premised on a finding that the Government of Ontario’s procurement of electricity under the FIT Programme is undertaken “with a view to commercial resale”. Rather, it is based on our finding that Article III:8(a) does not cover discriminatory treatment of the equipment used to generate the electricity that is procured by the Government of Ontario. Furthermore, we have mooted the Panel’s intermediate findings, including the finding that the Government of Ontario’s procurement of electricity under the FIT Programme and Contracts is undertaken “with a view to commercial resale”. Thus, we do not consider it necessary to address further Canada’s claims.
 

N.1.11A.2 ARTICLE III:8(B) — SUBSIDIES TO DOMESTIC PRODUCERS.
 

SCM Agreement, Article III:8 of the GATT 1994 — Subsidies (S.2.42)
 

N.1.11A.2.1 Canada — Periodicals, p. 33, DSR 1997:I, p. 449 at 478
(WT/DS31/AB/R)
 

A proper interpretation of Article III:8(b) must be made on the basis of a careful examination of the text, context and object and purpose of that provision. In examining the text of Article III:8(b), we believe that the phrase “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” helps to elucidate the types of subsidies covered by Article III:8(b) of the GATT 1994. It is not an exhaustive list of the kinds of programmes that would qualify as “the payment of subsidies exclusively to domestic producers”, but those words exemplify the kinds of programmes which are exempted from the obligations of Articles III:2 and III:4 of the GATT 1994.
 

N.1.11A.2.2 Canada — Periodicals, p. 34 and Footnote 73 thereto, DSR 1997:I, p. 449 at 478–479
(WT/DS31/AB/R)
 

Our textual interpretation is supported by the context of Article III:8(b) examined in relation to Articles III:2 and III:4 of the GATT 1994. Furthermore, the object and purpose of Article III:8(b) is confirmed by the drafting history of Article III. In this context, we refer to the following discussion in the Reports of the Committees and Principal Sub-Committees of the Interim Commission for the International Trade Organization concerning the provision of the Havana Charter for an International Trade Organization that corresponds to Article III:8(b) of the GATT 1994:
 

This sub-paragraph was redrafted in order to make it clear that nothing in Article 18 could be construed to sanction the exemption of domestic products from internal taxes imposed on like imported products or the remission of such taxes. At the same time the Sub-Committee recorded its view that nothing in this sub-paragraph or elsewhere in Article 18 would override the provisions of Section C of Chapter IV.73
 

We do not see a reason to distinguish a reduction of tax rates on a product from a reduction in transportation or postal rates. Indeed, an examination of the text, context, and object and purpose of Article III:8(b) suggests that it was intended to exempt from the obligations of Article III only the payment of subsidies which involves the expenditure of revenue by a government.
 

N.1.11A.2.3 Canada — Periodicals, p. 34, DSR 1997:I, p. 449 at 479
(WT/DS31/AB/R)
 

We agree with the panel in United States — Malt Beverages that:
 

Article III:8(b) limits, therefore, the permissible producer subsidies to “payments” after taxes have been collected or payments otherwise consistent with Article III. This separation of tax rules, e.g. on tax exemptions or reductions, and subsidy rules makes sense economically and politically. Even if the proceeds from non-discriminatory product taxes may be used for subsequent subsidies, the domestic producer, like his foreign competitors, must pay the product taxes due. The separation of tax and subsidy rules contributes to greater transparency. It also may render abuses of tax policies for protectionist purposes more difficult, as in the case where producer aids require additional legislative or governmental decisions in which the different interests involved can be balanced.
 

N.1.11A.2.4 Canada — Periodicals, p. 35, DSR 1997:I, p. 449 at 479
(WT/DS31/AB/R)
 

… For these reasons, we reverse the Panel’s findings and conclusions that Canada’s “funded” postal rates scheme for periodicals is justified under Article III:8(b) of the GATT 1994.
 

N.1.12 Relationship between Article III and Article XX. See also General Exceptions: Article XX of the GATT 1994, Article XX(g) — Jurisdictional limitation (G.3.10)     back to top

N.1.12.1 EC — Asbestos, para. 115
(WT/DS135/AB/R)
 

We do not agree with the Panel that considering evidence relating to the health risks associated with a product, under Article III:4, nullifies the effect of Article XX(b) of the GATT 1994. Article XX(b) allows a Member to “adopt and enforce” a measure, inter alia, necessary to protect human life or health, even though that measure is inconsistent with another provision of the GATT 1994. Article III:4 and Article XX(b) are distinct and independent provisions of the GATT 1994 each to be interpreted on its own. The scope and meaning of Article III:4 should not be broadened or restricted beyond what is required by the normal customary international law rules of treaty interpretation, simply because Article XX(b) exists and may be available to justify measures inconsistent with Article III:4. The fact that an interpretation of Article III:4, under those rules, implies a less frequent recourse to Article XX(b) does not deprive the exception in Article XX(b) of effet utile. Article XX(b) would only be deprived of effet utile if that provision could not serve to allow a Member to “adopt and enforce” measures “necessary to protect human … life or health”. Evaluating evidence relating to the health risks arising from the physical properties of a product does not prevent a measure which is inconsistent with Article III:4 from being justified under Article XX(b). We note, in this regard, that, different inquiries occur under these two very different Articles. Under Article III:4, evidence relating to health risks may be relevant in assessing the competitive relationship in the marketplace between allegedly “like” products. The same, or similar, evidence serves a different purpose under Article XX(b), namely, that of assessing whether a Member has a sufficient basis for “adopting or enforcing” a WTO-inconsistent measure on the grounds of human health.
 

N.1.13 Article XVII of the GATS. See also MFN Treatment, Article II of the GATS (M.2.2); National Treatment, Article III:4 of the GATT 1994 — “less favourable treatment” (N.1.11)     back to top

N.1.13.1 EC — Bananas III, para. 241
(WT/DS27/AB/R)
 

We see no specific authority either in Article II or in Article XVII of the GATS for the proposition that the “aims and effects” of a measure are in any way relevant in determining whether that measure is inconsistent with those provisions. In the GATT context, the “aims and effects” theory had its origins in the principle of Article III:1 that internal taxes or charges or other regulations “should not be applied to imported or domestic products so as to afford protection to domestic production”. There is no comparable provision in the GATS. Furthermore, in our Report in Japan — Alcoholic Beverages the Appellate Body rejected the “aims and effects” theory with respect to Article III:2 of the GATT 1994. The European Communities cites an unadopted panel report dealing with Article III of the GATT 1947, United States — Taxes on Automobiles as authority for its proposition, despite our recent ruling.
 

N.1.14 Article 3.1 of the TRIPS Agreement. See also National Treatment, Article III:4 of the GATT 1994 — “less favourable treatment” (N.1.11)     back to top

N.1.14.1 US — Section 211 Appropriations Act, paras. 242–243
(WT/DS176/AB/R)
 

As we see it, the national treatment obligation is a fundamental principle underlying the TRIPS Agreement, just as it has been in what is now the GATT 1994. The Panel was correct in concluding that, as the language of Article 3.1 of the TRIPS Agreement, in particular, is similar to that of Article III:4 of the GATT 1994, the jurisprudence on Article III:4 of the GATT 1994 may be useful in interpreting the national treatment obligation in the TRIPS Agreement.
 

As articulated in Article 3.1 of the TRIPS Agreement, the national treatment principle calls on WTO Members to accord no less favourable treatment to non-nationals than to nationals in the “protection” of trade-related intellectual property rights. The Footnote to Article 3.1 clarifies that this “protection” extends to “matters affecting the availability, acquisition, scope, maintenance and enforcement of intellectual property rights as well as those matters affecting the use of intellectual property rights specifically addressed” in the TRIPS Agreement. …
 

N.1.14.2 US — Section 211 Appropriations Act, paras. 261–265
(WT/DS176/AB/R)
 

… the report of the panel in US — Section 337. That panel reasoned that “the mere fact that imported products are subject under Section 337 to legal provisions that are different from those applying to products of national origin is in itself not conclusive in establishing inconsistency with Article III:4”.
 

That panel stated further that:
 

[I]t would follow … that any unfavourable elements of treatment of imported products could be offset by more favourable elements of treatment, provided that the results, as shown in past cases, have not been less favourable. [E]lements of less and more favourable treatment could thus only be offset against each other to the extent that they always would arise in the same cases and necessarily would have an offsetting influence on the other. (emphasis added) [BISD 36S/345, para. 5.12]
 

And that panel, importantly for our purposes, concluded that:
 

… while the likelihood of having to defend imported products in two fora is small, the existence of the possibility is inherently less favourable than being faced with having to conduct a defence in only one of those fora. (emphasis added) [BISD 36S/345, para. 5.19]
 

… It is likewise not disputed that, under Section 211(a)(2), in every individual situation where a non-United States successor-in-interest seeks to assert its rights without the express consent of the original owner or its bona fide successor-in-interest, the United States courts are required not to recognize, enforce or otherwise validate any assertion of rights. We emphasize that this situation exists under the statute on its face, and that, therefore, unlike the situation with respect to the granting of a special licence to United States successors-in-interest by OFAC, this situation assumes no action by OFAC or by any other agency of the United States Government.
 

The United States may be right that the likelihood of having to overcome the hurdles of both Section 515.201 of Title 31 CFR and Section 211(a)(2) may, echoing the panel in US — Section 337, be small. But, again echoing that panel, even the possibility that non-United States successors-in-interest face two hurdles is inherently less favourable than the undisputed fact that United States successors-in-interest face only one.
 

N.1.14.3 US — Section 211 Appropriations Act, para. 267
(WT/DS176/AB/R)
 

The United States has not shown, as required under the national treatment obligation, that, in every individual case, the courts of the United States would not validate the assertion of rights by a United States successor-in-interest. Moreover, even if there is, as the United States argues, a likelihood that United States courts would not enforce rights asserted by a United States successor-in-interest, the fact remains, nevertheless, that non-United States successors-in-interest are placed by the measure, on its face, in an inherently less favourable situation than that faced by United States successors-in-interest. And, even if we were to accept the United States argument about the doctrine of non-recognition of foreign confiscation, presumably that doctrine would apply to those who are not nationals of the United States as well as to those who are. Any application of this doctrine would therefore not offset the discrimination in Section 211(a)(2), because it would constitute yet another, separate obstacle faced by nationals and non-nationals alike. Hence, it would not offset the effect of Section 211(a)(2), which applies only to successors-in-interest who are not United States nationals.
 

N.1.14.4 US — Section 211 Appropriations Act, para. 286
(WT/DS176/AB/R)
 

… to fulfill the national treatment obligation, less favourable treatment must be offset, and thereby eliminated, in every individual situation that exists under a measure. Therefore, for this argument by the United States to succeed, it must hold true for all Cuban original owners of United States trademarks, and not merely for some of them.
 

N.1.14.5 US — Section 211 Appropriations Act, para. 289
(WT/DS176/AB/R)
 

… the very existence of the additional “hurdle” that is imposed by requiring application to OFAC is, in itself, inherently less favourable. Sections 211(a)(2) and (b) do not apply to United States original owners; no application to OFAC is required. But Cuban original owners residing in the “authorized trade territory” must apply to OFAC. Thus, such Cuban original owners must comply with an administrative requirement that does not apply to United States original owners. …
 

N.1.14.6 US — Section 211 Appropriations Act, para. 294
(WT/DS176/AB/R)
 

… We are, therefore, not satisfied that Section 515.201 would offset the inherently less favourable treatment present in Sections 211(a)(2) and (b) in each and every case. And, because it has not been shown by the United States that it would do so in each and every case, the less favourable treatment that exists under the measure cannot be said to have been offset and, thus, eliminated.
 

 

209. We are also mindful that such duties and charges are permitted only when their nature and level are recorded in a Member’s Schedule, they do not exceed the level recorded in such Schedule, and they existed on the relevant date specified in the Understanding on Article II:1(b) of the General Agreement on Tariffs and Trade 1994.     back to text

207. We also note that the GATT Panel in US — Section 337 Tariff Act held that:

[T]he “no less favourable” treatment requirement of Article III:4 has to be understood as applicable to each individual case of imported products. The Panel rejected any notion of balancing more favourable treatment of some imported products against less favourable treatment of other imported products. If this notion were accepted, it would entitle a contracting party to derogate from the no less favourable treatment obligation in one case, or indeed in respect of one contracting party, on the ground that it accords more favourable treatment in some other case, or to another contracting party. Such an interpretation would lead to great uncertainty about the conditions of competition between imported and domestic products and thus defeat the purposes of Article III.
(GATT Panel Report, US — Section 337 Tariff Act, para. 5.14)

     back to text

499. The European Union explains that, when it refers to product “characteristics”, it does so not as necessarily referring to physically detectable characteristics, but as referring to elements that define the nature of the product more broadly. The European Union submits that the environmental profile or the environmental attributes that a particular product may incorporate, even if they do not materialize into any particular physical characteristic, could legitimately form part of the requirements of the product purchased that are closely related to the subject matter of the contract. …     back to text

500. We do not address in this case rules for determining the origin of products purchased. It has not been alleged in this case that the Minimum Required Domestic Content Levels are rules of origin.     back to text

73. … Article 18 and Section C of Chapter IV of the Havana Charter for an International Trade Organization correspond, respectively, to Article III and Article XVI of the GATT 1947.     back to text


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