Law

International Trade Law

National Treatment
Role Name Affiliation
Principal Investigator Dr. Ranbir Singh Vice Chancellor, National
Law University, Delhi
Co-P.I. Prof. Dr. G.S. Bajpai Registrar, NLU, Delhi
Paper Coordinator Dr. Saloni Khanderia-Yadav National Law University,
Delhi
Content Writer/Author Dr. Saloni Khanderia-Yadav National Law University,
Delhi
Content Reviewer Dr. Prabhash Ranjan South Asian University,
Delhi
Language Editor Dr. Saloni Khanderia-Yadav National Law University,
Delhi

PERSONAL DETAILS

DESCRIPTION OF MODULE

Items Description of Module

Subject Name Law
Paper Name International Trade Law
Module Name/Title National Treatment
Module Id 7
Pre-requisites  Significance of national treatment provision,
 What is the difference between Articles III.2 and
III.4?
 Concept of like products and how is it different from
the concept of directly competitive and substitutable
products,
 What is the role of Article III.1 in interpretation of
Articles III.2 and III.4?

Objectives To understand the following:

 To understand the concept on national treatment and

the significance of the same in liberalizing and
further achieving the goals of international trade
policy as regulated by the World Trade Organization.
 To analyze the concept and significance of national
treatment.
 To throw light on the scope and impact of the
concepts of like products vis-à-vis directly
 substitutable products.
Keywords GATT, national treatment, like products, directly competitive
or substitutable products, discrimination.

E-TEXT

Topics & Sub-Topics covered

7.1. Introduction:
7.2. Significance of the National Treatment Provision
7.3. The bearing of Article III of the GATT on internal taxes and internal charges
7.3.1. What do we understand by internal taxes and internal charges?
7.3.2. Understanding ―in excess of‖
7.4. The concept of “like” products vis-à-vis “directly competitive or substitutable
products”
7.4.1. Understanding the concept of directly competitive or substitutable products
7.4. Article III: 4 and its bearing to Regulatory Measures in the form of laws,
requirements and regulations
7.6. Internal quantitative regulations
7.6.1. Exception to paragraph five
7.7. Allocation among external sources of supply
7.8. Government procurement as an exception to the principle of national treatment
in the GATT, 1947
7.9. Summary

TEXT

7.1. Introduction:
The principle of national treatment is expressed in Article III of the GATT, 1947 and
is one of the core principles of the GATT and the international trade regime. Like the
term suggests, the principle endeavors to provide equal treatment to goods that
originate or are being exported by foreign countries, and “like” domestic goods.
Against this backdrop, it would be pertinent to note that where on the one hand, the
principle of most favored nation endeavors to provide equal treatment to “like”
products or goods belonging to Member nations inter se; the principle of national
treatment delves to provide equal treatment to “like” goods of foreign nations vis-à-
vis domestic goods. In this respect, the principle of national treatment seems to have a
larger bearing on international trade regulation simply due to the fact that nations are
more likely to discriminate against foreign goods vis-à-vis their own goods; than
discriminate between foreign goods inter se. in other words, the Article III of the
GATT imposes an obligation on the Members to provide equal treatment to foreign
Member nations, as far as “like” products are concerned; and thus not “afford
protection to domestic production.”
For this purpose, Article III: 1 states that:
―The contracting parties recognize that internal taxes and other internal
charges, and laws, regulations and requirements affecting the internal sale,
offering for sale, purchase, transportation, distribution or use of products,
and internal quantitative regulations requiring the mixture, processing or
use of products in specified amounts or proportions, should not be applied to
imported or domestic products so as to afford protection to domestic
production.‖
Apropos, paragraph 1 of Article III acts as the preamble for the principle of national
treatment. Therefore, it general specifies that internal tax, internal charges and laws,
regulations and requirements for the sale and purchase, transportation or distribution
of imported goods must not be applied in a manner that the same results in affording
protection to domestic like products. The remaining paragraphs of Article III
thereinafter provide a detailed explanation of the application of the principle with
respect to individual aspects such as internal taxes and charges; laws, regulations and
requirements; and lastly purchase sale, transportation and distribution of imported
goods.
7.2. Significance of the National Treatment Provision:
The principle of National Treatment endeavors to prohibit discrimination (both de
jure1 and de facto2) between domestic and imported goods and services that are like.

1
De jure discrimination refers to discrimination that is spelt out in the law. For a detailed discussion on
the concept, kindly refer to the module pertaining to the most favored nation treatment.
2
De facto discrimination refers to the discrimination that is implied by means of the governmental
measures of the given Member country. For a detailed discussion on the concept, kindly refer to the
module pertaining to the most favored nation treatment.
In essence, the principle of national treatment seeks to promote trade liberalization.
With this, the principle of national treatment sought to provide tariff concessions to
countries in general as against limiting them to countries that had negotiated for the
same.
Against this backdrop, Article III of the GATT, 1947 aims and endeavors to achieve
the following:
 It seeks to promote the conditions of competition between countries. In the Japan –
Alcoholic Beverages Case, the Appellate body held that “the fundamental purpose of
the Principle of national treatment is to prevent protectionism in the application of
internal tax and regulatory measures.” 3 National treatment entails to improve the
conditions of competition in the market, and any protectionism afforded to imported
production shall directly hamper the conditions of competition. Prejudices against
goods that are not locally made are considered to be unfair trade practices; with the
principle of national treatment ensuring that free trade is fair and fair trade is free.
 It seeks to ensure that imported goods are not subjected to any discrimination in the
country of importation by way of measures either in the form of internal taxes or
internal charges and laws, regulations and requirements…is not applied in such a
manner so as to afford protection to domestic production.
 Hence, national treatment ensures that imported goods will be afforded the same
treatment as domestic goods in matters that are under the control of the government.

With the discrimination first being prohibited by the General Agreement on Tariff and
Trade, 1947 in the form of the „grandfathering paragraphs‟ of national treatment and
that of the most favored nation, discrimination has also been subsequently been
upheld in the agreements forming the World Trade Organization in the year 1995.
7.3. The bearing of Article III of the GATT on internal taxes and internal charges:
Like mentioned in the previous paragraphs, Article III, paragraph I acts as the
preamble of the principle of national treatment as elucidated in the above mentioned
Article. For that reason, paragraph I sets out the general treatment towards imported
goods with respect to internal taxes and internal charges; laws, regulation;
transportation, sale, purchase; so on and so forth. On the other hand, the subsequent
paragraphs from paragraph 2 through paragraph 10 set out the treatment that must be

3
Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R
and WT/DS11/AB/R (Nov. 1, 1996).
offered by domestic producers towards producers of imported “like” goods with
respect to specific measures.
In a related vein, paragraph 2 of Article III sets out the bearing of the principle of
national treatment towards internal taxes and internal charges.
7.3.1. What do we understand by internal taxes and internal charges?
It is important to note that GATT which is now a part of the WTO is applicable to
merely governmental measures. Hence, private measures or measures applied by
private persons do not fall within the purview of the GATT. Accordingly, the terms
internal taxes and internal charges refer to the taxes and charges applied by means of
a governmental measure once the goods in question have crossed the boundary and
entered the jurisdiction of the importing nation. Therefore, internal taxes refer to the
taxes applied once the imported goods have entered the boundary of the importing
nation; and taxes need to be levied for the sale of the good.4 For instance, applied
taxes, specific taxes and ad voleram taxes are common examples of internal taxes. At
the same time, service tax and value added tax or VAT is also a common example of
taxes. On the other hand, internal charges are the charges applied for the sale,
purchase, transportation or storage of the imported good in the jurisdiction of the
importing nation.
Consequently, Article III: 2 states that:
―The products of the territory of any contracting party imported into the
territory of any other contracting party shall not be subject, directly or
indirectly, to internal taxes or other internal charges of any kind in excess of
those applied, directly or indirectly, to like domestic products. Moreover, no
contracting party shall otherwise apply internal taxes or other internal
charges to imported or domestic products in a manner contrary to the
principles set forth in paragraph 1.‖

4
However, it is important to note that the Panel, in Argentina-Hides and Leather noted that internal
taxes and charges could sometimes be levied before they reach the border and may still be considered
as internal for the purpose of this Article. In the above mentioned dispute, the Panel considered the pre
payment of VAT on imports (IVA) as an internal tax; irrespective of the fact that it was collected prior
to the importation. See, Panel Report, Argentina – Measures Affecting The Export Of Bovine Hides And
The Import Of Finished Leather, WT/DS155/R
19 December 2000
With the intent of truly reducing and removing tariff and non-tariff barriers to trade,
the principle of national treatment, as seen above is keen to ensure that goods are
given the same treatment as that of „like‟ goods in the domestic market; i.e. the
country of importation.
In particular, the GATT aims at providing equality to imported and domestically
produced goods. The principle of National Treatment set forth in Article III of the
Agreement forming the GATT, states that internal taxes and internal charges
i. shall not be so applied imported products so as to be in excess, directly or indirectly,
of domestic products;
ii. and to afford protection to „like‟ domestic goods.5

Consequently, Article III: 2 which pertain to the application of the principle of national
treatment with respect to internal taxes and charges are divided into two parts. The first part
of paragraph two is the first sentence; which states that:

The products of the territory of any contracting party imported into the territory of
any other contracting party shall not be subject, directly or indirectly, to internal
taxes or other internal charges of any kind in excess of those applied, directly or
indirectly, to like domestic products.

Apropos, according to the first part of paragraph 2, two points need to be significantly kept in
mind while applying the provisions of Article III: 2.

5
General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-3.2, 55 U.N.T.S. 194 [hereinafter
GATT, 1947].
7.3.2. Understanding ―in excess of‖:
Question One: Are the products in question ―like‖?
Prior to understanding the phrase “in excess of”, it is important to note that the
principle of National Treatment set in Article III of the GATT is applicable when the
discriminatory conduct in question is towards goods that are alike. In other words, a
Member nation is permitted to provide different treatment to unlike or dissimilar
products. For this reason, in order to gain a complete understanding of the first
sentence of Article III: 2 of the GATT, one must first understand the concept of like
products.
The concept of “like” products with reference to the principle of national treatment set
in Article III of the GATT, 1947 is similar to that in the most favored nation treatment
set in Article I of the GATT; elucidated in the previous module. However, for the
purpose of discussion in this module, the concept would be discussed in brief again.
With respect to the concept of like products referred to in Article III: 2 of the GATT,
1947; the Japan-Alcoholics Beverage dispute best illustrates the same.6 The question
at issue in this particular dispute was whether Japan was providing discriminatory
conduct towards alcoholic beverages like vodka, gin and whiskey; in comparison to
the treatment offered with respect to internal taxes and internal charges towards the
Japanese local drink names “sochu”.
As we are aware, “like” imported products must not be subject to internal taxes or
internal charges in excess of those applied towards domestic products. For this reason,
the question at debate was primarily whether the Japanese local drink names “sochu”
was like the imported alcoholic beverages like vodka, gin and whiskey. In other
words, one must first ascertain if and whether the goods at question are alike; and
only if the answer the question is positive, can one proceed to examine if the said like
products have been subjected to internal taxes and internal charges that are in excess
to those applicable to domestic products.
In the above mentioned dispute, the issue before the Panel was whether imported
vodka, gin and whiskey was provided discriminatory treatment in comparison to the
local traditional drink of Japan named “sochu”.

6
Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R
and WT/DS11/AB/R (Nov. 1, 1996). (Hereinafter referred to as the Japan-Alcohol dispute).
The Panel in this dispute was of the view that despite the fact that vodka and sochu
had different alcoholic strengths, it did not necessarily mean that the two would have
been dissimilar products. For this matter, it even examined that the Japanese Schedule
of Concessions had classified both vodka and sochu within the same heading. 7 In
addition, the Panel re-called the criteria laid down in the Panel Report of the Border
Tax Adjustment dispute; namely, a) the property, nature and quality of the products; b)
the end uses of the product; c) consumer tastes and habits and d) tariff classification
of the products. Hence, the physical properties, the extent to which the product may
be perceived as serving the same end use, the extent to which consumers perceive and
treat the products as an alternative and the international classification of the products
for tariff purposes is what ought to be taken into account.8 On appeal, the Appellate
Body agreed with the above mentioned views of the Panel and upheld that vodka and
sochu must be considered as like goods for the purpose of this dispute.

While Japan argued that the two shared no similarities, the Panel in its Report (which
was later upheld by the Appellate Body) stated that the two should be regarded as
alike due to the fact that the two shared the same physical characteristics and even the
same end-use. The differences in the same simply lie in the fact that the process of
filtration is not the same. In elaboration, the Panel gave a comparison of other
alcoholic beverages like „rum‟ to sochu, stating that the two cannot be considered as
„like‟ products because of the difference in the ingredients, while „whiskey‟ and
„brandy‟ had different appearances to that of „sochu‟. At the same time, „gin‟ „genever‟
and „liqueurs‟ contained certain addictives. To this extent, vodka and sochu must be
considered as like products given the fact that they are similar in appearances and
even have identical end-uses. There were however, no clear guidelines as to the
circumstances in which goods may be considered as „like.‟
Question Two: Are the ―like‖ imported products being internally taxed or internally
charged in excess of domestic products?

7
For this purpose, while vodka was classified within the Harmonized system of Classification under
heading 2208.90, sochu was classified under heading 2208.60; and had the same tariff being applied to
both.
8
Appellate Body Report, European Communities – Measures affecting Asbestos and Asbestos
containing products, WT/DS145/AB/R, Para. 102 (March 12, 2001).
Once it has been ascertained that the products in question are like, one must next
examine whether the “like” products have be internally taxed or internally charged at
rates in excess of that which are being charged to domestic goods. While ensuring that
internal taxes or internal charges are not applied in excess, the principle of National
Treatment in GATT ensures that even the slightest difference in the amount of taxes
makes the measure illegal. The exception of de minimus hence is not a valid exception
to the principle. Internal taxes and internal charges, on the other hand must be
different than that applied to similar goods.
For this purpose, the Panel examined whether vodka had been charged in excess of
that in comparison to the Japanese local drink named sochu. The Panel held that
despite the fact that the two products in question had been ascertained to be like
products, vodka which was an imported product was been taxed at 9,927 Yen per
degree of alcohol; whereas sochu was being taxed at merely 6,228 Yen per degree of
alcohol. 9 Accordingly, the Panel Report (subsequently agreed to by the Appellate
Body Report) held that vodka had been taxed in excess of in comparison to sochu.
The second part of Article III: 2 states that apart from restraining the application of
excess internal taxes and duties towards imported like products, no Contracting Party
must additionally apply internal taxes or other internal charges to imported or
domestic products in a manner contrary to the principles set forth in paragraph 1 (i.e.
to afford protection to domestic products).

In other words, two criteria must be satisfied:

i. The internal tax or internal charge must not be in excess of that applicable to like
domestic goods; and
ii. These internal taxes and charges must not be applied in a manner that distort
conditions of competition and consequently afford protection to domestic products.

This means that even when a Contracting Party has satisfactorily fulfilled the first
criteria; it must in addition successfully prove that the internal taxes or internal
charges have not been applied in a manner that would distort the competition in favor
of the domestic production. To this effect, the Panel in Argentina-Hides and Leather

9
Panel Report, Japan-Alcohol, para.6.24
noted that the intention of Article III: 1 (first sentence) is not to directly impact
internal taxes or charges directly as policy measures; but rather ensure that their
operation does not in any manner have a negative impact on competition between
domestic and imported products.10

The US – Automobiles dispute aptly elucidates this second factor; namely whether
internal taxes and internal charges have been applied to distort conditions of
competition and afford protection to like domestic products.11
The question before the Panel in the above mentioned dispute was whether certain
products that were being imported to the United States which were above USD
30,000 were in any manner different to those being sold below USD 30,000 in order
to be considered as luxury products; and hence be subject to a different and higher tax.
Consequently, it was important to decide whether the automobiles that fell in the
former category were “like” or similar to the automobiles that fell in the latter
category; and if so, was the difference in the taxes in order to afford protection to the
domestic industry.
In the concerned dispute, E.U. alleged that the U.S. was taxing certain luxurious
products such as boats, aero planes, fur and the like, sold above the threshold limit of
USD 30,000 at 10% in excess of the retail price; and that such products were similar
to or like products being sold under the said amount. For this purpose, the Panel was
left with two primary questions to answer:
i. Are the products like or similar?; and
ii. Are the like products being treated differently in order to afford protection to the
domestic industry?

For the purpose of determining the answer to the first question, the Panel referred to
the criteria laid down in the Border Tax Adjustment dispute (discussed above).
Therefore, the end uses, common features and physical characteristics must be taken
into account of while determining if the products in question are alike or similar.

10
See, Panel Report, Argentina – Measures Affecting The Export Of Bovine Hides And The Import Of
Finished Leather, WT/DS155/R
19 December 2000
11
Panel Report, United States-Taxes on Automobiles, (11 Oct, 1994) (Unadopted), DS31/R.
Once it has been determined that the products are similar, it must be ascertained
whether the said products have been subject to an internal tax or internal charge that
has been in excess of that being charged with respect to domestic products. In
addition, like the second sentence of Article III: 2 mentions, the Panel and Appellate
Body are left to determine if and whether this excess tax/charge has been imposed for
the purpose of affording protection to the domestic industry.
Against this backdrop, Article III: 2 makes it requisite to read the same in light of
paragraph 1 which sets out the purpose of the Article. Consequently, the Panel noted
that paragraph 2 of Article III aims at preventing the parties from imposing internal
taxes or internal charges that are in excess of those imposed for domestic like
products; and the reason for imposing such excess taxes/charges is to afford
protection to the domestic industry. In a related vein, the Panel noted that the aim and
intention of the parties must be taken into account of. Hence once it has been
established that the aim of the party was to afford protection to domestic industry, it
must additionally be established that the intention was to distort conditions of
competition in favor of the domestic industry.
For the purpose of the US-Taxes on Automobiles dispute, the Panel held that the U.S.
conduct of imposing a higher tax for luxury products above USD 30,000 did not
violate Article III: 2 simply because U.S. did not impose a higher tax in order to
afford protection to domestic productions and consequently distort conditions of
competition in the domestic market. The Panel additionally noted that the U.S. itself
was selling a large number of products that fell outside the threshold limit of USD 30,
000; and additionally E.U. also had enough opportunity to export products under the
threshold limit. For the same reason, the Panel held that the U.S. had not violated
Article III: 2 as it did not classify the products for the purpose of affording protection
and distorting the conditions of competition; according to the aims and intent test.
It is important to note at this juncture that the Appellate Body in the Japan-Alcoholic
Beverages dispute disregarded the aims and intent test set out in the U.S.-Automobile
dispute. What the Appellate Body regarded however was that Members are not
permitted to impose internal taxes and internal charges that are not only in excess of
those imposed on domestic products; but also for the purpose of affording protection
to the domestic production.12

7.4. The concept of “like” products vis-à-vis “directly competitive or substitutable

products”:
The concept of like products has been discussed in detail above. Like mentioned in
the previous section, the criteria for the determination of like products was first laid
down in the Border Tax Adjustments dispute; and has been referred to relentlessly by
subsequent Panels for the determination of like products. For the purpose of
determining “like” products, the criterion has therefore remained constant for both the
Most Favored Nation Treatment and the National Treatment principles.
The first sentence of Article III: 2 (discussed above) is applicable only when the
discrimination in question by means of an internal tax or internal charge is between
goods that are imported and domestic; and such goods are alike.13 In other words, the
first sentence of paragraph two is restricted to like products. On the other hand, the
second sentence of Article III: 2 pertains to directly competitive or substitutable
products.
In a related vein, while the second sentence states that apart from restraining the
application of excess internal taxes and duties towards imported like products,

―… No Contracting Party must additionally apply internal taxes or other

internal charges to imported or domestic products in a manner contrary to
the principles set forth in paragraph 1 (i.e. to afford protection to domestic
products).‖

Accordingly, as mentioned in the previous section, the principle of national

treatment of the GATT entails equal that not only should:

12
Panel Report, Japan — Taxes on Alcoholic Beverages, WT/DS8/R, WT/DS10/R, WT/DS11/R,
adopted 1 November 1996, as modified by the Appellate Body
Report, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, DSR 1996:I. [hereinafter referred to as
Japan-Alcoholic Beverages II].
13
Article III: 2 provides:
“The products of the territory of any contracting party imported into the territory of any other
contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges
of any kind in excess of those applied, directly or indirectly, to like domestic products.‖
 i. Internal taxes and charges be the same for imported and domestic products that
are similar;
ii. And the manner of applying the same (for example the method of calculation) be
in such a way that the domestic industry for such similar or like products does
not distort the competition in its favor. It thus creates a level playing field for
imported vis-à-vis domestic like products.

Nevertheless, the second sentence of paragraph two is wider in scope, given its
applicability towards not only “like” products, but additionally also products that may
not be like, but would be considered as directly competitive or substitutable to the
domestic product. Against this backdrop, the Ad Note to Article III: 2 provides that,
―A tax conforming to the requirements of the first sentence of paragraph 2
would be considered to be inconsistent with the provisions of the second
sentence only in cases where competition was involved between, on the one
hand, the taxed product and, on the other hand, a directly competitive or
substitutable product which was not similarly taxed.‖

internal tax of
charged for a
"like" good from a
Member is the
BUT, the manner same as the "like"
of calculating the domestic product
internal tax is not
the same

and results in
distortion of
conditions of
competition.

would be considered as a "directly

competitive or substitutable".

The Ad Note to paragraph two therefore makes it clear that:

i. An internal tax of a certain Member or Contracting Party of the GATT may be the
same (and not in excess of) for both imported and domestic like products (in
accordance to the first sentence of paragraph two).
 ii. Nevertheless, the said internal tax may still be inconsistent with paragraph two (the
second sentence) when the manner of applying the internal tax is such that it would
distort conditions of competition between goods that are not merely like: but also
directly competitive or substitutable.

This connotes that the second sentence of paragraph two is certainly wider in scope,
given the application of the Ad Note mentioned above. Consequently, one must
understand the true difference between products that are alike and products that are
not alike, but on the contrary directly competitive or substitutable.

7.4.1. Understanding the concept of directly competitive or substitutable products:

In the previous section, we examined how products that are like must be similar in all
respects. Hence, they must have similar end-uses; or the physical characteristics must
be the same; or the likeness may be adjudged from consumer preferences. Against
this backdrop, vodka and sochu were adjudged by the Panel and the Appellate Body
to be similar, in the Japan-Alcoholic Beverages dispute. The two products were
primarily similar because they physical characteristics were similar: the two being
while, clean spirits. On the contrary, whiskey, gin and genever were considered as
unlike: but directly competitive or substitutable products. In this dispute, the Panel
and Appellate Body held that whiskey, gin and genever were primarily different given
the use of addictives (in gin and genever vis-à-vis sochu), the color (whiskey versus
sochu) and the difference in ingredients (in rum and sochu). However, the Panel and
Appellate Body clarified that despite these alcoholic beverages being dissimilar, they
were certainly directly competitive or substitutable.14

Against this backdrop, the Panel in the Japan-Alcoholic case 15 emphasized that
besides the physical characteristics, common end uses and tariff classifications; the

14
Panel Report, Japan Alcoholic Beverages, para. 6.23; read along with Appellate Body Report, Japan
Alcoholic Beverages, para 20-24.
15
Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R
and WT/DS11/AB/R (Nov. 1, 1996).
„market place‟ and „elasticity of substitution‟16 must also be identified before goods
are considered as “directly competitive or substitutable.”Imported goods that are „like‟
or “directly competitive or substitutable” are said to be discriminated against only
when they are not similarly taxed as their domestic counterparts. The rationale,
behind this dissimilar taxation should then be proved to be applied in such a manner
so as to afford protection and hamper competitive conditions in the market.17
The Chile- Alcoholic Beverages case18 best illustrates the same. In this case, a certain
Chilean tax measure that increased the tax rate along with the increase in alcohol
content was scrutinized. The tax rate increased by 4% with every degree in the
increase of alcohol content; the minimum being less than or equal to 35 degree
charged with 27% tax ad volerem. The Panel in this case found that approximately
75% of the domestic production had an alcohol content of less than 35 degree;
therefore being charged at the lowest of 27%, and that the majority of the imported
beverages had an alcoholic content of 39% which was liable to a tax rate of 47%, thus
being the highest. The Panel, in this case found that imported beverages were
“directly competitive or substitutable” with that of domestic beverages and that the
tax measures of Chile were with a view to afford protection to domestic goods and
thereby distort competition in the market.

In the Korea- Alcohol case, the Panel noted that product categories must not be so
narrowly construed so as to defeat the purpose of non-discrimination provided in
Article III. Apples and oranges could hence be regarded as “directly competitive or
substitutable”; as illustrated by the Geneva session of the Preparatory Committee.19

7.4. Article III: 4 and its bearing to Regulatory Measures in the form of laws,
requirements and regulations:
The previous section explained the application of the principle of national treatment
as set in Article III of the GATT, 1947, to internal taxes and charges. Paragraph four

16
Elasticity of substitution identifies how consumers are likely to substitute one product for another.
17
Appellate Body Report, Japan-Alcoholic Beverages, para 24-25
18
Appellate Body Report, Chile-Taxes on Alcoholic Beverages, WT/DS87, 110/AB/R (Jan. 12, 2000).
19
Appellate Body Report, Korea – Taxes on Alcoholic Beverages, WT/DS75/AB/R, WT/DS84/AB/R
para 10.38 (Jan. 18, 1999).
on the other hand pertains to providing a level playing field and equal competitive
conditions as far as regulatory measures by means of laws, requirements and
regulations are concerned. In other words, the GATT prohibits Contracting Parties
from enacting laws, regulations, requirements and other regulatory measures that
distort conditions of competition in favor of the domestic industry.
Against this backdrop, paragraph 4 provides:
―The products of the territory of any contracting party imported into the
territory of any other contracting party shall be accorded treatment no less
favorable than that accorded to like products of national origin in respect of
all laws, regulations and requirements affecting their internal sale, offering
for sale, purchase, transportation, distribution or use. The provisions of this
paragraph shall not prevent the application of differential internal
transportation charges which are based exclusively on the economic
operation of the means of transport and not on the nationality of the product.‖

must be
imported from
a Contracting
Party

National
Treatment with
respect to laws,
regulations and
requirements

Must be subject
to treatment no
Products must
less favorable
be alike
to like domestic
products

Against this backdrop, the principle of national treatment also encompasses regulatory
measures that are governmental in nature by way of laws, regulations and other
requirements that affect internal sale, offering for sale, purchase, transportation,
distribution or use of imported goods that accords less favorable treatment to
imported products than „like‟ domestic products. Hence, any form of government
action that seeks to provide protectionism to domestic goods over imported goods,
violate the principle of national treatment.
The US- Gasoline dispute was the first dispute before the WTO Dispute Settlement
Body after the coming into birth of the WTO.20 Apart from various other questions
before the Panel, the latter was also requested to decide whether the US measure had
violated Article III: 4; in a dispute brought before the DSU by Venezuela and Brazil.
The law under dispute in this case was the US Clean Air Act, 1963; that aimed at
controlling pollution and thus improving the environment. For this purpose, the Act
segregated the areas, and identified nine areas that had severe pollution. Consequently,
it directed that only “reformulated gasoline” could be sold in these localities. In
localities that did not face such high pollution levels, “conventional gasoline” could
continue to be sold. However, for the purpose of selling the latter, the producers had
to ensure that it was as clean as it was in the year 1990. To that end, the year 1990
was the baseline, to which both conventional and reformulated gasoline was supposed
to be compared to in the future. For the purpose of comparison, a domestic refiner that
operated for a minimum period of six months in the year 1990 was permitted to
establish a refinery baseline to produce gasoline similar to that in the year 1990.21
Consequently, such a refiner was permitted to use any of the methods, namely:
i. Using the quality and volume of gasoline produced in 1990; or
ii. The data of the blendstocks and records of the gasoline in 1990; in the event that
confirming to the first method is impractical and unachievable; or
iii. The data on the quality of the blendstocks of gasoline post 1990; and this data may be
used only when confirming to any of the above two methods is impractical for the
refiner.22

The issue:
The issue pertaining to the method of assigning a refiner according to the above-
mentioned methods was under dispute. In other words, according to the Clean Air Act
and the methods it identified; an importer of gasoline was only permitted to use the
first method, namely use of the data on the quality and volume of gasoline produced

20
Appellate Body Report, United States — Standards for Reformulated and Conventional
Gasoline, WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I.
21
Appellate Body Report, US-Gasoline, para 6.1.
22
Appellate Body Report, US-Gasoline, para 6.2.
in 1990. On the other hand, domestic producers were permitted to use any of the three
methods. Consequently, Venezuela and Brazil urged that the Clean Air Act had
violated the principle of national treatment because it imposed different and more
stringent conditions for foreign producers. As a result, foreign producers interested in
exporting gasoline to the United States were required to make expensive changes to
their refineries in order to comply with the first method. Venezuela and Brazil
therefore alleged that not only did the U.S. violate Paragraph 4 of Article III, but also
did so in order to afford protection to the domestic producers: thereby violating
Article III: 1 as well.23
The findings of the Panel:
The Panel held that the U.S. had violated both Article III: 1 and III: 4, mainly
because the methods identified for setting up a refinery were not the same for
domestic producers and importers of gasoline. Hence, by permitting importers to only
use the first method (i.e. the use of the data of the volume of gasoline in 1990), the
Act had violated the principle of national treatment by according treatment that was
less favorable to importers of a like product. For this purpose, the Panel referred to the
criterion used to identify like product in the Border Tax Adjustment dispute and Japan
Alcoholics Beverage dispute. Consequently, the Panel noted that imported and
domestic gasoline as similar in physical characteristics and its end uses. In addition,
the Clean Air Act was a law by virtue of Article III: 4 and created certain rules that
required to be followed; failing which defaulters would face a penalty. To this end,
the Panel requested the U.S. to bring its law in conformity with the international
obligations under Article III: 1 and III: 4.24

The violation of Article III: 4 was in question before the Dispute Settlement Body in
the Korea-Beef case.25 In this dispute, the Panel analyzed a Korean law requiring two
retail distribution systems for the sale of beef, one for imported beef and the other for

23
Appellate Body Report, US-Gasoline, para 6.3-6.4.
24
Appellate Body Report, US-Gasoline, para 6.5-6.16.
25
Appellate Body Report, Korea- Measures Affecting Importation of Fresh, Chilled and Frozen Beef,
WT/DS161, 169/AB/R (Jan. 10, 2001).
domestic beef. Accordingly, a “Specialized Imported Beef Store” can sell only
imported beef, while another retailed can sell only domestic beef. A supermarket may
however sell both domestic and imported beef. Post 1990, Korea promulgated a dual
retail system, wherein retailers had to choose the type of beef they desired to sell:
domestic or imported. In the result, most retailers preferred to sell domestic beef,
hampering the sale of imported beef. Gradually, a new retail system was incorporated
to provide for the sale of imported beef. The new retail system nevertheless resulted
in merely approximately 5,000 shops selling imported beef as against (approximately)
45,000 shops selling domestic beef. The Panel, in this case held that the treatment
accorded to imported beef with the introduction of the dual retail system by the
Korean law and regulation, is less favorable than the treatment given to the like
domestic beef; a finding that was upheld by the Appellate Body.
The Canada-Foreign Investment Review Act dispute initiated by the United States,
further clarifies the various nuances of paragraph 4 of Article III of the GATT,
1947. 26 The dispute revolves around the Canadian measure vide the Foreign
Investment Review Act regarding the purchase undertakings the Act sought to
obligate vis-à-vis foreign investors. Apropos, the Act obliged the foreign investors to
purchase Canadian goods in certain quantities and also to manufacture in Canada, as
against importing goods from foreign sources.27
The question before the DSB was whether the above-mentioned provision in the Act
was a violation of the principle of national treatment and whether the same is:
i. A law, regulation and requirement within the meaning of Article III: 4 of the GATT,
1947;
ii. Does the Canadian obligation offer less favorable treatment to foreign importers vis-
à-vis domestic suppliers?
iii. Is this obligation a manner to afford protection to domestic suppliers and producers?28

The United States alleged that the Act fell within the purview of law, regulation or
requirement because it obliged foreign investors wishing to do business in Canada, to
use domestic goods whenever “available”, “reasonably available” or “competitively

26
Panel Report, Canada — Administration of the Foreign Investment Review Act, adopted
7 February 1984, BISD 30S/140. [hereinafter referred to as the Canada-Investment dispute]
27
Panel Report, Canada-Investment, para 1.1.
28
Panel Report, Canada-Investment, para 3.1.
available”. Accordingly, the U.S alleged that this provision in the Canadian Act acted
as a requirement for foreign investors, because like Canadian goods would almost
always be available, reasonably available or competitively available. In addition, even
in instances where foreign investors did not agree as to the competitiveness and the
quality of the Canadian product, the matter would always be subject to a controversy.
As a result, the obligation by means of an undertaking to purchase goods from Canada
whenever possible provided less favorable treatment to foreign investors.
Consequently, the U.S. also alleged that the Act was a requirement in order to invest
and do business in Canada because providing an undertaking simply made it easier for
foreign investors to do business with the Canadian government. In other words, even
though foreign investors were only required to present their proposal to invest and do
business; in most cases they would prefer to give an undertaking in order to make it
easier to gain an acceptance. It was for this reason that the U.S. alleged that the
Foreign Investment Review Act was a requirement since providing an undertaking in
turn provided a benefit to the investors; whereas on the contrary, failing to do so
resulted in a loss.29
The Panel in this dispute ruled in favor of the United States and noted that the
provisions of the Canadian Act certainly acted as a requirement within the scope and
meaning of the principle of national treatment of the GATT, 1947. It noted that the
application of Section 9(c) read along with Section 21 of the Foreign Investment
Review Act was certainly a requirement because of the manner in which it was
worded. In other words, Section 9 (c) states that
―Any written undertakings…relating to the proposed or actual investment
given by any party thereto conditional upon the allowance of the
investment…‖30
Whereas Section 21 provides:
―Where a person who has given a written undertaking…fails or refuses to
comply with such undertaking, a court order shall be made directing such a
person to comply with the undertaking.‖31

29
Panel Report, Canada-Investment, para 3.5-3.11.
30
Panel Report, Canada-Investment, para 5.4.
31
Panel Report, Canada-Investment, para 5.4.
Against this backdrop, the Panel noted that the relevant Sections mentioned
above were a requirement irrespective of the fact that the foreign investors were
free to provide an undertaking at the time of presentation of the proposal. Hence,
once they provided an undertaking, they were obligated to comply failing which
a penalty would follow.
In addition, the words “available”, “reasonably available” and “competitively
available” reduced the options of foreign investors; by prohibiting them to choose
imported products whenever a like domestic product was available. Consequently,
the Panel noted that this resulted in less favorable treatment to foreign products;
which were mainly aimed at affording protection to the domestic industry.
Therefore, even if foreign investors were free not to offer an undertaking; the fact
that once they did, imported product were offered less favorable treatment vis-à-
vis like domestic products was certainly a violation of the principle of national
treatment.32
7.6. Internal quantitative regulations:
The principle of national treatment provided for in the GATT, 1947 additionally
prohibits the application of internal quantitative regulations. In other words, in
the event a Contracting Party of the GATT mandates an importer to use a certain
amount of domestic products (as intermediates), during the production of the
final products, the former would said to have violated the principle of national
treatment. This provision seeks to provide the freedom to importers to choose the
manner of production of final goods; and moreover prohibit Contracting Parties
to protect domestic suppliers and distort competitive conditions in favor of such
domestic suppliers. To this end, the principle prohibits a Contracting Party from
making it mandatory for importers to make use of domestic supplies (either as
specified amounts or proportions); as part of mixing, processing or use of the
products. For this reasons, Article III: 5 provides that:
―No contracting party shall establish or maintain any internal quantitative
regulation relating to the mixture, processing or use of products in specified
amounts or proportions which requires, directly or indirectly, that any

32
Panel Report, Canada-Investment, para 5.6 -5.9.
 specified amount or proportion of any product which is the subject of the
regulation must be supplied from domestic sources. Moreover, no contracting
party shall otherwise apply internal quantitative regulations in a manner
contrary to the principles set forth in paragraph 1.‖

The Canada – Foreign Investment Review Act dispute discussed in the previous
section also revolved around the scope of paragraph five of the principle of
national treatment. In brief, the question before the Panel was whether the relevant
provisions of the Foreign Investment Review Act that obliged foreign investors to
purchase, in specified amounts, goods of Canadian origin; were in violation of
paragraph five of Article III of the GATT, 1947. It was discussed in the previous
section pertaining to the relevant dispute in question, that Canada did not per se
mandate foreign investors to undertake that the former would source from
domestic Canadian suppliers. On the contrary, foreign investors themselves
preferred to provide an undertaking to that effect; in order to make it easier to do
business with the Canadian government. Hence, it was only after a foreign
investor had provided an undertaking to that effect, was it mandatory for the
former to comply with the same by means of sourcing from domestic suppliers.
For this reason, the Canadian obligation did not have an “umbrella” effect making
it mandatory for all foreign investors to comply. In addition, Sections 9 (c) and
Section 21 were only applicable to such foreign investors providing such an
undertaking. Against this backdrop, the Panel was now left to consider whether
such forms of “regulations” that did not have a general application; but rather
merely a specific application towards the investors providing the undertaking, were
prohibited by virtue of paragraph five. The United States urged that despite the fact
that the undertakings did not have the effect of general regulations, but they were
certainly enacted in order to impact competition and afford protection to domestic
producers. Hence, they were nevertheless prohibited by Article III: 5 (last
sentence). To this end, the Panel ruled in favor of the United States on this ground.
It is important to note that the first sentence of Article III: 5 pertains to the
application of internal quantitative regulations towards the mixture, processing and
use of domestic supplies. However, the provision has a wide scope and to that
effect ensures that even though an internal quantitative regulation that is neither of
the three mentioned above (mixture, processing or use); it may still be in order to
afford protection to domestic suppliers, and thus prohibits the latter as well.
Nevertheless, the scope of this paragraph is intended to cover instances of
international trade between domestic vis-à-vis foreign traders of like products. For
this reason, the Ad Note to paragraph five clarifies that even though an internal
quantitative regulation would be in compliance with the first sentence, it would
additionally be in compliance with the second sentence as well, if the other forms
of internal quantitative regulations (other than pertaining to mixtures, processing or
use) were made applicable to a) merely domestic products, b) being produced in
substantial quantities.33
7.6.1. Exception to paragraph five:
Article III: 10 is an exception to paragraph five elucidated in the previous
paragraph. Hence, while paragraph five forbids the use of internal quantitative
regulations that require sourcing from domestic producers; paragraph ten permits
the use of internal quantitative regulations when the same are applicable to
cinematograph films; and for the purpose of allocation of screen quotas.
For this purpose, paragraph ten provides that:
―The provisions of this Article shall not prevent any contracting party from
establishing or maintaining internal quantitative regulations relating to
exposed cinematograph films and meeting the requirements of Article IV.‖

In this respect, the application of an internal quantitative regulation by a Contracting

Party by means of screen quotas for cinematograph films is permitted; and does not
lead to a violation of the principle of national the GATT, 1947. Screen quotas are
quotas that are applied by the domestic industry for exposed cinematograph films,
stating that domestic films must be run for a minimum number of hours per year per
theatre: in order to protect the domestic cinematograph industry.

7.7. Allocation among external sources of supply:

33
Panel Report, Canada-Investment, Para. 3.12 and 5.13.
While the previous section dealt with the existence of internal quantitative
regulations in order to support and allocate sources from the domestic industry,
Article III: 7 pertains to the allocation among external sources of supply. In other
words, the difference lies in the fact that paragraph five pertains to allocation
among domestic sources; whereas paragraph seven pertains to the allocation
among foreign suppliers.
For this purpose, paragraph seven provides that:
―No internal quantitative regulation relating to the mixture, processing or
use of products in specified amounts or proportions shall be applied in such
a manner as to allocate any such amount or proportion among external
sources of supply.‖

Hence, for instance an importing Contracting Party is not permitted to apply an

internal quantitative regulation that necessitates that a part of the mixture or
processing or a product (by way of an intermediate) must be sourced from a certain
foreign source only. This is specifically application in the current era where the
production of final goods depends on the use of intermediates or inputs from various
countries. Hence, elucidating the illustration mentioned above, suppose India seeks to
import a certain product, let‟s assume cars. India is then, by virtue of paragraph seven,
not permitted to impose an internal quantitative regulation stating that the inputs (in
this case the parts of the car) must be sourced from specific external sources. Hence,
India cannot impose a condition stating that the engine must be sourced from the
United States, or the wheels must be sourced from China. Doing so would make India
liable under Article III: 7.

7.8. Government procurement as an exception to the principle of national treatment

in the GATT, 1947:
Government procurement is based on the postulation that governments may have their
own preferences in certain matters essential for the purpose of governance such as
rails, roads, airlines, etc. and may in the process hire its own choice of suppliers.
Article III: 8 of the GATT gives due recognition to this need of the governments by
stating that the principle of national treatment is not applicable to laws, regulations or
requirements governing the procurement by governmental agencies of products that
are exclusively for governmental use and not for commercial resale or even for use in
products that are commercially sold. The Tokyo Round subsequently witnessed the
adoption of an Agreement on Government Procurement with one major difference,
that being that the Agreement was plurilateral in nature, hence making accession to
the Agreement purely optional. 34 Drafters however recognized that government
procurement could be discriminatory in nature, undermining the objectives of the
GATT-WTO; hence making it obligatory to publish procurement opportunities and
criteria for awarding contracts in cases of government supplies.
Accordingly, Article III: 8 of the GATT provide that:
―(a) The provisions of this Article shall not apply to laws, regulations or
requirements governing the procurement by governmental agencies of
products purchased for governmental purposes and not with a view to
commercial resale or with a view to use in the production of goods for
commercial sale.

(b) The provisions of this Article shall not prevent the payment of subsidies
exclusively to domestic producers, including payments to domestic producers
derived from the proceeds of internal taxes or charges applied consistently
with the provisions of this Article and subsidies effected through
governmental purchases of domestic products.‖

Against this backdrop, paragraph eight of the principle of national treatment of the
GATT provides two exceptions to this principle. Firstly, government procurement
that has been given a legal effect by means of a law, regulation or requirement; as a
result of which such government agencies decide to buy products in violation of the
principle of national treatment (for instance by procuring by exclusively domestic
suppliers; or by insisting that a certain amount of imports contain a percentage of
domestic products as intermediates). However, such government procurement is only

34
The Agreement on Government Procurement, Jan. 1, 1995, 1867 U.N.T.S. 194 [hereinafter the GPA].
The GPA has 28 Members, operating as a plurilateral agreement under Annex 4 of the WTO; and is
exempted from the rule of the GATT-WTO that all members of the GATT must also be party to any
Agreement of the WTO subsequently adopted.
permitted when the government agencies procure the products for government
purposes and not for re-selling the product so procured in the commercial market. In
other words, suppose a government office seeks to purchase a product, let‟s assume
furniture for its offices; the said office may insist that the goods must contain a certain
percentage of domestic wood as intermediates. Such an act would be in compliance
with the principle of national treatment of the GATT, 1947 only if the said
(governmental) office seeks to use the furniture for personal use and does not intend
to sell the same.

Secondly, the governments of Contracting Parties of the GATT, 1947 are permitted to
provide subsidies to domestic producers (only), by means of the payments such
government may have received by means of the internal tax and internal charge that
was collected in compliance to the second paragraph (discussed above). For instance,
a government of a Contracting Party (assume India) is permitted to provide subsidies
(by way of a loan, payments, etc.) to exclusively domestic producers of certain goods
(assume cars or food grains). Accordingly, these subsidies would be paid from the
proceeds of the internal taxes and internal charges that were levied (on imports) in
compliance with paragraph two; or in other words were not in excess of those charged
to like/directly competitive or substitutable domestic products, so as to afford
protection to the latter.

7.9. Summary:
With this lesson we have learnt the following:
The principle of national treatment set in Article III of the GATT, 1947 entails that:
 Contracting parties must not treat imports of products entering their territory in a
manner that affords protection and distorts competitive opportunities in favor of
domestic products. Hence it sets out the purpose of the principle of national treatment
and ensures a level playing field between domestic and imported products. For this
matter, inter alia internal taxes, internal charges and regulatory requirements must be
the same for domestic and imported products. (Paragraph 1).
 According to the purpose (mentioned above), internal taxes and internal charges on
imported products, must not be levied in excess to those levied on “like” domestic
products. In addition internal taxes and internal charges must not be levied even on
 directly competitive and substitutable products in a manner that affords protection
to the domestic industry. (Paragraph 2).
 As far as regulatory requirement such as laws, regulations and requirements that
affect transport, sale, purchase and the like are concerned; the same must operate in a
manner that does not treat “like” imported products in a less favorable manner.
Nevertheless, transport charges once the imported products have entered the domestic
market of another Contracting Party may be different simply because of the differing
costs among different means of transport. This does not violate the principle of
national treatment of the GATT, 1947. (Paragraph 4).
 No Contracting Party must maintain an internal quantitative regulation that stipulates
that imported products must be sourced from domestic sources for processing,
mixture or its use. (Paragraph 7). The only exception is internal quantitative
regulations that are applied on cinematograph films by means of screen quotas.
(Paragraph 10).
 In addition, Contracting Parties must not even maintain internal quantitative
regulations that allocate the amounts to be used in a mixture, processing or the use of
a certain product, among external sources of supply. (Paragraph 7).
 Government procurement of products that are not meant for commercial re-sale may
require that such procurement be made from exclusively domestic producers: thus
otherwise being in violation of the principle of national treatment. However, when
such procurement is made for personal use (and not commercial re-sale), such
procurement would be permitted under the provisions of national treatment of the
GATT, 1947. In a related vein, the government of a Contracting Party is also
permitted to pay domestic producers, by means of a subsidy, proceeds that it would
collect from internal taxes and internal charges. (Paragraph 8).