1. Introduction The phrase ‘likeproducts’ appears sixteen times throughout the GATT Agreement, however, the definitionof the concept may vary from one GATT provision to another1.
National Treatment (NT) violations are dealt with under Article III of theGATT. A country will be deemed to be in breach of an NT violation where internalmeasures adopted by countries inhibit trade. For instance, when an importedproduct is deemed to be ‘like’ a domestic product it must be treated in thesame way once it has cleared customs, otherwise there will be a violation of ArticleIII. Article XX on the other hand deals with the general exceptions to the rulesimposed in Article III. In internationalagreements, fiscal powers remain within the realm of the government sovereigntyto the extent that they do not alter competitive opportunities of similar goods2.
Governments make several choices, many of which are manifested in the non-tradefiscal policy of the state, such choices could be to increase or decrease rawmaterials or encourage small entrepreneurship. In essence governments normally distinguishbetween products for ‘non-tradeconcerns’3.However, an infinite number of non-trade measures can distort the market andaffect trade. Without the chance to show that measures fall within thepermissible realm of non-trade policies, governments will be wary of enactingnon-trade policies for fear that these policies may have unintended effects ontrade and may result in dispute proceedings4. This paper deals with Article III of the GATTon internal measures and seeks to evaluate the various meanings of ‘likeproducts’ under the Article. The analysis of Article III will be done using GATT/WTOcase law and relevant academic articles to streamline the views of the Paneland Appellate Body when interpreting ‘like products’. Furthermore the paperwill also assess whether the narrow definitions of ‘likeness’ within the GATT/WTODispute Settlement Body limits the ability of its members to take into accountnon-trade concerns within the ambits of Article III of the GATT.
2. ArticleIII: 2 Article III: 2 ofthe GATT is broken down into two sentences. In the first sentence of theArticle, two questions are posed, answers to which, determine whether aviolation has occurred.
The first question relates to whether the imported anddomestic products are like products, and the second question relates to whetherthe tax imposed on imported products is more than that imposed on domesticproducts5.If the answers to both questions are affirmative then there is a violationunder the first sentence of Article III: 2. Ingeneral, the GATT does not define or give any guidance about thecharacteristics of products, which determine “likeness”. There are however aplethora of cases analysing the meaning of ‘like products’ in the firstsentence of Article III.
In Japan-Alcoholic Beverages II6the Appellate body stated that the concept of like products in relation to thefirst sentence of Article III: 2 should be interpreted narrowly because of theexistence of the concept of ‘directly competitive or substitute products’ usedin the second sentence of Article III: 2. Consequently the Appellate body usedthe basic approach for determining likeness set out in the Working Paper on BorderTax Adjustments7(“Working paper”). The working paper illustrated that the problems arising fromthe interpretation of likeness should be treated on a case-by-case basis, anapproach believed to encourage a fair assessment in each case of the differentelements that constitute like products. The working paper further provided a criteriafor determining, on a case-by-case basis whether goods are ‘like products’,these include: the products end uses in a given market; its potential consumerstastes and habits; and the product’s properties, nature and quality8. However in deviationfrom the Working Paper, the GATT Panel (“the Panel”) in earlier case of US-Malt Beverages9chose to interpret the ‘like product’ concept by considering, in additionto the various likeness factors, the policy objective stated in paragraph 1 ofArticle III. This addition of the policy objectives found in Article III: 1would mean that internal measures should not be applied to afford protection todomestic products10.The Panel thus interpreted Article III: 1 and Article III: 2 together to theeffect that the legitimacy of internal measures should be determined on the basisof their purpose and market effect.
In doing so, it was suggested that there wouldbe a need to determine the presence of a bona fide regulatory purpose andwhether their effect on competition is protective. This approach served as amethod for Panels to consider the legitimacy of certain non-trade concerns whenassessing the purpose of the measures placed by governments. Where they wereconsidered bona fide and notinherently protectionist, the measures would not be in breach of Article III:2.
This novel approach was considered in twoissues that resulted from the US-MaltBeverages case11.The first involved a Mississippi tax on wine that imposed different tax ratesaccording to the type of grapes used in making the wine. The US could not showany bona fide regulatory purpose for making the distinction between thevarieties of grapes; consequently the Panel concluded that the only glaringpurpose for the product distinction was to protect local producers12.In finding the tax differentiation to be protective the panel concluded thatthe product distinction had both the ‘aim and effect’ to protect trade. The second issue involvedseveral state regulations, which had restrictions on the sale of beer withalcohol levels exceeding 3.2 per cent. Canada argued that all beers where ‘likeproducts’ and the Panel noted various factors of ‘likeness’ both in favour forand against Canada. The Panel further went beyond by analysing the regulatorypurpose and competitive effects of the regulations.
The Panel noticed severalreasons of social welfare policy for making the product distinction and heldthat the product distinction did not create adverse conditions of competitionfor Canadian brewers because Canadian brewers produced other types of beersthat may not be caught by the measure. This further shows an attempt by thePanel to take into account ‘non-trade’ concerns, in this case, social welfarepolicy, in making decisions on the likeness of a product. In doing so, they extendedthe meaning of ‘likeness’ as prescribed by the Working paper. In disputeconcerning special tax levels of luxury cars, US- Taxes on Automobiles13,the Panel elaborated on the above approach and stated that ‘likeness’ should inmost cases include the examination of the ‘aims and effects’ of the taxmeasure.
In the case at hand the Panel held that aim or effect of the luxurytax on cars did not afford protection to the domestic production of cars.Hence, cars above and below $30,000 could not, in respect to luxury products,be considered like products. The Panel’s reasoning was that the regulationswere bona fide regulatory purposesand found that the competitive effects where neither clear enough nor inherentenough to be classified as protective. The ‘aim and effect’ test provided animprovement to the original analysis of likeness.
This is primarily because itconsigned the metaphysics of ‘likeness’ to a lesser role in its analysis bydepending on the trade effects of the regulation and whether or not the purposeof the measure was bona fide. Therebytaking into account non-trade measures to ascertain the intent of thequestioned regulation. Furthermore theaim and effect test allowed the consideration of the justification of theregulation at the same time the issue of violation was determined. The aim andeffect test therefore avoided the premature dismissal of valid complaints ongrounds that goods were not alike and the rigorous treatments given to claimsof regulatory justification under Article XX whenever goods were deemed to be’like products’14.
Notwithstandingthe advantages mentioned above, the ‘aim and effect’ test for determining thelikeness of goods was explicitly rejected by the Panel in Japan- Alcoholic Beverages II15.The Panel held that the ‘aim and effect’ test was not in line with the wordingof the first sentence of Article III: 2. They came to this analysis by drawing-onthe fact that the ‘aim and effect’ test emanated from the wording in ArticleIII: 1 – “so as to afford protection”. In the Panels view there were no wordsin the first sentence of Article III: 2 that made reference to “so as to affordprotection” in Article III: 1 and consequently the ‘aim and effect’ of themeasure16. Furthermore thePanel deemed it appropriate that a complainant will have the burden of not onlyshowing the effect of a particular measure, which is in principle discernablebut also its aim, which can be indiscernible. This appears to be the case wherethere is a multiplicity of aims sought through enactment of legislation, it is expectedthat difficulty would arise in determining the application of the aim andeffect test17.
Most importantly the list of exceptions contained in Article XX could berendered useless because the ‘aim and effect’ test does not contain a list ofgrounds for the justification of the departure from obligations incorporated inArticle III. In buttressing this point it is important to note that the purposeof Article XX was to provide a list of exceptions, subject to conditions, thatwould otherwise have led to unjustifiable discrimination or disguisedrestriction of international trade. Therefore if a country uses health policyin the context of the ‘aim and effect’ test to justify derogation from ArticleIII, the standard of proof established in Article XX would be circumvented andsuch a country will not have to prove that a health measure is ‘necessary’ toachieve the health objective as prescribed in Article XX18. In light of the foregoing, the actions of thePanel demonstrate that the ‘aim and effect test used in US Tax on Automobiles should be rejected.
This ruling has served tobe the norm in relation to Article III: 2 ever since. Consequently the’likeness’ of products under Article III: 2 are to be treated narrowly and notbroadly by considering the non-trade policy objectives of the regulation. Atthis point it is important to note that where the Dispute Settlement Body ofthe WTO/GATT adopts the reports of Panel or Appellate Body, the conclusions andrecommendations become binding on the parties to the dispute. Therefore where aPanel (and the Appellate Body) has found inconsistency, they recommend that thedefaulting Member concerned should bring it measure in conformity with WTO/GATTlaw19.
However it is also important to note that although said decisions are bindingon the members to a particular dispute, the reports of the Dispute SettlementBody are not binding precedents for other disputes between the same parties onother matters or different parties on the same matter20. 3. ArticleIII: 4 Article III: 4states that products of one member State imported into another member Stateshall be accorded treatment no less favourable than that accorded to likeproducts in the other state in relation to regulation, laws and requirementsaffecting the internal sale, offering for sale, distribution or use. In Korea- Various Measures on Beef21the Appellate Body provided a three step test for determining violationsunder Article III: 4.
In order to prove a violation one will need to show thatthe measure at hand is a law, regulation or requirement covered by Article III:4; the imported and domestic products are like products; and the importedproducts are accorded less favourable treatment. In EC-Asbestos22the Appellate Body sought to consider whether the concept of ‘likeproducts’ in Article III: 4 was to be treated with the same narrowinterpretation as the first sentence of Article III: 2. On this issue, it was notedthat Article III: 2 contained two separate sentences, each imposing a differentobligation; the first sentence deals with ‘like products’; and the second sentencedeals with ‘directly competitive or substitutable’ products23.However Article III: 4 applies to only ‘like products’ and does not contain anyprovisions equivalent to the second sentence of Article III: 2. They furtheradded that under Article III: 2, the interpretation of the first sentenceaffects the second sentence. Therefore the scope of the term ‘like products’ inthe first sentence of Article III: 2, affects and is affected by the scope ofthe second sentence on ‘directly competitive and substitutable’ products. Assuch, following from the fact that the second sentence constitutes a broadercategory of products, which are not ‘like products’ as contemplated by thefirst sentence, they decided that the first sentence should be construednarrowly to prevent a deviation from the measures its strict terms are expectedto uphold. In relation to Article III: 4, there is an absenceof the same interpretative consideration because the ‘general principle’articulated in Article III: 1 is expressed in Article III: 4 in a singlesentence, (and not in two sentences as in Article III: 2) therefore, themeaning of “like products” attributed to Article III: 2 is different from thatin Article III: 4.
According to the Appellate Body the meaning of ‘likeness’stretches in a different way in Article III: 4. Due to the factthat the decision in Japan- AlcoholicBeverages did not express how far the Appellate Body’s rejection of the’aim and effect’ approach would reach, questions arose as to whether adifferent approach to carrying out the policy stated in Article III: 1 would benecessary. This was because the Panel in BananaIII24considered employing a version of the ‘aim and effects’ test known as the ‘protectiveapplication’ concept to Article III: 4.
Indoing so they did not propose an elaborate analysis, they merely considered itappropriate to discern the protective application of a measure from its design,architecture and the revealing structure under Article III: 4.The AppellateBody rejected and reversed this initiative by upholding that, like Article III:2, the wording in Article III: 1 had no explicit reference to Article III: 4.On this basis the Appellate body held that it would be inappropriate for aPanel to make further inquiry on the protective application when applying the likeproducts test of Article III: 4. In finding a distinctionbetween ‘like products’ under Article III: 2 and Article III: 4, the AppellateBody in EC-Asbestos sought todetermine the definition of ‘like products’ under Article III: 4.
The term wasto be interpreted in consonance with the objective pursued by Article III asenunciated in the ‘general principles’ in Article III: 1 and the specificinterests expressed under Article III: 4. The reasoning of the Appellate Bodyin EC- Asbestos25was that products in competitive relationships in the market place could beaffected through treatment of imports in a ‘less favourable’ manner than thatascribed to domestic products. On this basis, the determination of ‘likeness’under Article III: 4 would be the extent of competitive relationship betweenand among products. In holding this view they noted that although the scope of’like products’ under Article III: 4 would be broader than the concept of ‘likeproducts’ under the first sentence of Article III: 2, it would certainly not bebroader than the combined product of the two sentences of Article III: 2, whichalso includes directly competitive and substitutable products in its secondprong. In respect of the criteria of determining’like products’ under Article III: 4, the Appellate body stated that as with ArticleIII: 2, no one approach will be appropriate for all cases, giving theimpression that the criteria will be determined on a case-by-case basis26.They did however provide the criterion of ‘likeness’ as prescribed by theWorking Party on Border Tax Adjustment and included four characteristics tocomplement the four criterion that the product in question could share, namely:the physical properties; the extent to which products are capable of servingthe same or similar end-users; the extent to which consumers perceive and treatthe products as alternative means of performing particular functions in orderto satisfy certain wants and demands; and the international classification ofthe products for tariff purposes. 4. Conclusion A commoncharacteristic on the scope of likeness is that it has expanded overtime27,this can be seen in Brazilian Internal Taxes194928where conhaque and cognac were deemed to be different products due to theaddictive and aromatic differences, whereas in Japan Alcoholic Beverages Shochu, Vodka, rum and liqueurs were allconsidered like products.
The aim and effect test brought about a breaker tothe narrow interpretation of like products through cases like US- Taxes on Automobiles and Malt Beverages. This era was short-livedas the aim and effect test was rejected for being an approach that circumventedthe national treatment obligation. Now it seems tribunals have marched backinto the area of traditional means for determining likeness of product asenvisaged by the narrow definition in the Working paper.
The issue here is thatthere are many government policies which may be deemed as ‘non-trade’ concernsthat are taken for legitimate purposes and create merely incidental burdens onthe like products of imported goods that may be caught by this sweepingprohibition29.There ought to be a better balance to fulfil the drive for free trade and thelegitimate regulatory autonomy of each WTO state30.This balance can perhaps be achieved by interpreting the Article XX generalexception more generously. However, there is hope, because Panel/Appellate bodydecisions are not binding on their subsequent counterparts.
Therefore there isa possibility that the law will evolve in order to take into consideration the non-tradeconcerns of governments within the ambits of ‘likeness’ under Article III ofthe GATT.1 Report of the Working Party on BorderTax Adjustments, BISD 18S/97, para. 18.2 Serena B.
Willie, Recapturing a LostOpportunity: ArticleIII: 2 GATT 1994 Japan-Taxes on Alcoholic Beverages 1996
Hudec, GATT/WTO Constriantson National Regulation: Requiem for an Aim and Effects Test, 32 Int’L. 619(1998).15 Appellate Body Report, Japan – Taxes onAlcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1November 1996, DSR 1996:I, p. 9716 Ibid17 Van den Bossche,P. and W. Zdouc, The Law and Policy of the World Trade Organization: Text,Cases and Materials, 4th ed., Cambridge UP, 2017.
18 Appellate Body Report, Japan – Taxes onAlcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November1996, DSR 1996:I, p. 9719 Article 19.1Dispute Settlement Understanding20 WTO, Legal effectof panel and appellate body reports and DSB recommendations and rulings, https://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c7s2p1_e.htm,accessed 21 January, 2017 21 Korea – Measures Affecting Imports ofFresh, Chilled, and Frozen. Beef (complaint by the United States, WT/DS161/1,and WT/DS169/1, complaint by Australia).
22 Appellate Body Report, EuropeanCommunities – Measures Affecting Asbestos and Asbestos-Containing Products,WT/DS135/AB/R, adopted 5 April 2001, DSR 2001:VII, p. 324323 Ibid24 EC — Bananas III. Appellate Body Report,European Communities — Regime for the Importation, Sale and Distribution ofBananas, WT/DS27/AB/R, 199725 Appellate Body Report, EuropeanCommunities – Measures Affecting Asbestos and Asbestos-Containing Products,WT/DS135/AB/R, adopted 5 April 2001, DSR 2001:VII, p.
324326 Ibid27 WonMog Choi, Overcoming the ‘Aim and Effect’Theory: Interpreting of the ‘Like Product’ in GATT Article III, U.C. DavisJ. Int’L. & Pol’y 107 (2002)28 Brazilian Internal Taxes, adopted on 30June 1949 and 13 December 1950, BISD11/182,para.
7: GATT Secretariat 29 WonMog Choi, Overcoming the ‘Aim and Effect’Theory: Interpreting of the ‘Like Product’ in GATT Article III, U.C. DavisJ.
Int’L. & Pol’y 107 (2002)30 Ibid