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III. Article II back to top
A. Text of Article II
Article II: Schedules of Concessions
1. (a) Each contracting party shall accord to the commerce of the
other contracting parties treatment no less favourable than that
provided for in the appropriate Part of the appropriate Schedule annexed
to this Agreement.
(b)
The products described in Part I of the Schedule relating to any
contracting party, which are the products of territories of other
contracting parties, shall, on their importation into the territory to
which the Schedule relates, and subject to the terms, conditions or
qualifications set forth in that Schedule, be exempt from ordinary
customs duties in excess of those set forth and provided therein. Such
products shall also be exempt from all other duties or charges of any
kind imposed on or in connection with the importation in excess of those
imposed on the date of this Agreement or those directly and mandatorily
required to be imposed thereafter by legislation in force in the
importing territory on that date.
(c)
The products described in Part II of the Schedule relating to any
contracting party which are the products of territories entitled under
Article I to receive preferential treatment upon importation into the
territory to which the Schedule relates shall, on their importation into
such territory, and subject to the terms, conditions or qualifications
set forth in that Schedule, be exempt from ordinary customs duties in
excess of those set forth and provided for in Part II
of that Schedule.
Such products shall also be exempt from all other duties or charges of
any kind imposed on or in connection with importation in excess of those
imposed on the date of this Agreement or those directly or mandatorily
required to be imposed thereafter by legislation in force in the
importing territory on that date. Nothing in this Article shall prevent
any contracting party from maintaining its requirements existing on the
date of this Agreement as to the eligibility of goods for entry at
preferential rates of duty.
2. Nothing in this Article shall prevent any contracting party from
imposing at any time on the importation of any product:
(a) a charge equivalent to an internal tax imposed consistently with
the provisions of paragraph 2 of Article III in respect of the like
domestic product or in respect of an article from which the imported
product has been manufactured or produced in whole or in part;
(b) any anti-dumping or countervailing duty applied consistently with
the provisions of Article VI;
(c) fees or other charges commensurate with the cost of services
rendered.
3. No contracting party shall alter its method of determining
dutiable value or of converting currencies so as to impair the value of
any of the concessions provided for in the appropriate Schedule annexed
to this Agreement.
4.
If any contracting party establishes, maintains or authorizes, formally
or in effect, a monopoly of the importation of any product described in
the appropriate Schedule annexed to this Agreement, such monopoly shall
not, except as provided for in that Schedule or as otherwise agreed
between the parties which initially negotiated the concession, operate
so as to afford protection on the average in excess of the amount of
protection provided for in that Schedule. The provisions of this
paragraph shall not limit the use by contracting parties of any form of
assistance to domestic producers permitted by other provisions of this
Agreement.
5. If any contracting party considers that a product is not receiving
from another contracting party the treatment which the first contracting
party believes to have been contemplated by a concession provided for in
the appropriate Schedule annexed to this Agreement, it shall bring the
matter directly to the attention of the other contracting party. If the
latter agrees that the treatment contemplated was that claimed by the
first contracting party, but declares that such treatment cannot be
accorded because a court or other proper authority has ruled to the
effect that the product involved cannot be classified under the tariff
laws of such contracting party so as to permit the treatment
contemplated in this Agreement, the two contracting parties, together
with any other contracting parties substantially interested, shall enter
promptly into further negotiations with a view to a compensatory
adjustment of the matter.
6. (a) The specific duties and charges included in the Schedules
relating to contracting parties members of the International Monetary
Fund, and margins of preference in specific duties and charges
maintained by such contracting parties, are expressed in the appropriate
currency at the par value accepted or provisionally recognized by the
Fund at the date of this Agreement. Accordingly, in case this par value
is reduced consistently with the Articles of Agreement of the
International Monetary Fund by more than twenty per centum, such
specific duties and charges and margins of preference may be adjusted to
take account of such reduction; provided that the CONTRACTING PARTIES
(i.e., the contracting parties acting jointly as provided for in Article
XXV) concur that such adjustments will not impair the value of the
concessions provided for in the appropriate Schedule or elsewhere in
this Agreement, due account being taken of all factors which may
influence the need for, or urgency of, such adjustments.
(b)
Similar provisions shall apply to any contracting party not a
member of the Fund, as from the date on which such contracting party
becomes a member of the Fund or enters into a special exchange agreement
in pursuance of Article XV.
7. The Schedules annexed to this Agreement are hereby made an
integral part of Part I of this
Agreement.
B. Text of Ad Article II
Ad Article II: Paragraph 2 (a)
The cross-reference, in paragraph 2(a) of Article
II, to paragraph 2
of Article III shall only apply after Article III has been modified by
the entry into force of the amendment provided for in the Protocol
Modifying Part II and Article XXVI of the General Agreement on Tariffs
and Trade, dated September 14, 1948.(1)
(footnote original)
1 This Protocol entered into force on 14
December 1948.
Paragraph 2 (b)
See the note relating to paragraph 1 of Article
I.
Paragraph 4
Except where otherwise specifically agreed between the contracting
parties which initially negotiated the concession, the provisions of
this paragraph will be applied in the light of the provisions of Article
31 of the Havana Charter.
C. Interpretation and Application of Article II
1. Article II:1(a)
(a) Bonding requirements
69. In
US
— Certain EC Products, the Appellate Body reversed the
Panel’s finding that the United States had acted inconsistently with
Article II:1(a) and (b) of GATT 1994, first sentence, by increasing the
bonding requirements on certain products imported from the European
Communities in order to secure the collection of import duties whose
imposition, however, had not yet been determined at the time that the
increased bonding requirement was imposed. Referring to the increased
bonding requirements as the “3 March Measure”, the Panel stated,
inter alia: “We have found that the bonding requirements should be
assessed together with the rights/obligations they purport to protect,
being in this case, the right to collect tariffs at bound levels. The 3
March Measure imposed additional bonding requirements to guarantee
collection of 100 per cent tariff duty.”(126) In contrast, the Appellate
Body emphasized the distinction between the imposition of duties and the
increased bonding requirements:
“The task of the Panel … was … to examine the GATT-1994-
consistency of the increased bonding requirements; the Panel’s task
was not to examine the GATT 1994-consistency of the imposition of 100
per cent duties.
Nevertheless, the Panel examined the GATT 1994 consistency of the
increased bonding requirements in the light of the GATT 1994-consistency
of the imposition of 100 per cent duties, and concluded, on the basis of
this examination, that the increased bonding requirements are
inconsistent with Articles II:1(a) and II:1(b), first sentence, of the
GATT 1994. As the Panel had previously concluded that the imposition of
100 per cent duties and the increased bonding requirements were legally
distinct measures, and that the imposition of 100 per cent duties was
not in the Panel’s terms of reference, the Panel could not, based on
this reasoning, have come to the conclusion that the increased bonding
requirements are inconsistent with Articles II:1(a) and
II:1(b), first
sentence, of the GATT 1994.”(127)
(b) Qualification in schedules
70. In
Korea — Various Measures on Beef, the Panel ruled, in a
finding not reviewed by the Appellate Body, that pursuant to Article II
of the GATT 1994 any other “terms, conditions or qualifications”
that are added to import concessions, must be included in the schedules.
The Panel went on to find that “[g]iven that Korea made no such
qualification, and that imports of grass-fed beef by the LPMO are thus
restricted, the Panel finds that imports of grass-fed beef are accorded
less favourable treatment than that is provided for in Korea’s
Schedule, contrary to Article II:1(a).”(128)
(c) Implementation in WTO Schedules of HS changes
71. On 18 July 2001, the General Council approved new procedures to
introduce HS2002 changes to schedules of concessions.(129)
(d) Database for tariffs
(i) Integrated Data Base (IDB) Project
72. At its meeting on 24 June 1997, the Committee on Market Access
agreed to the restructuring of the existing Integrated Data Base (IDB)
from a mainframe environment to a Personal Computer (PC) based system,
which would utilize new technology to improve the operation of the IDB.(130) At its meeting of 16 July 1997, the General Council adopted the
Decision on the Supply of Information to the Integrated Data Base for
Personal Computers, which was approved and forwarded to the General
Council by the Committee on Market Access at its meeting of 24 June
1997.(131) At its meeting of 2 December 1997, the Committee on Market
Access further adopted two decisions concerning: (1) the deadlines for
IDB submissions, pursuant to the decision adopted by the General Council
on 16 July 1997 on the Supply of Information for the Integrated Data
Base for Personal Computers, and (2) access to the IDB.(132) At its
meeting on 31 May 1999, the Committee on Market Access further adopted
the document entitled “Dissemination of the Integrated Data Base”.(133)
At its meeting of 18 December 2000, the Committee on Market Access
adopted, on an ad referendum basis, the document entitled “Review of
the Operation of the Integrated Data Base (IDB) and Related Technical
Assistance Activities” and gave the Indian delegation until 22 January
2001 to provide comments.(134)
73. On 12 June 2002, the Committee on Market Access adopted the
dissemination policy of the IDB.(135) Since then several organizations
have been granted access to this database.(136)
(ii) Consolidated Tariff Schedule Data Base
74. At its meeting on 22 November 1995, the Committee on Market
Access agreed to the establishment of consolidated loose-leaf schedules
on the basis of a proposal by the Chairman contained in document
G/MA/TAR/W/4/Rev.2.(137) At its meeting on 29 November 1996, the Council
for Trade in Goods adopted the Decision on the “Establishment of
Consolidated Loose-Leaf Schedules”.(138) Earlier, at its meeting on 18
October 1996, the Committee on Market Access had approved the Decision
and had agreed to forward it to the Council for Trade in Goods for
approval.
75. At its meeting on 26 March 1998, the Committee on Market Access
approved the project proposal on the Consolidated Tariff Schedules (CTS)
Database.(139)
76. At its meeting on 28 July 2000, the Committee on Market Access
adopted the format for inclusion of agricultural commitments into the
CTS database on the understanding that the database has no legal basis
and that the data contained therein would be available to all
delegations at the same time.(140)
77. On 12 June 2002, the Committee on Market Access adopted the
dissemination policy of the CTS database.(141) Several organizations have
been granted access to this database.(142)
(iii) Review of the Understanding on the Interpretation of Article
XXVIII of GATT 1994
78. With respect to the review by the Committee of the Understanding
on the Interpretation of Article XXVIII of GATT 1994, see
paragraph 733 below.
(e) Information technology products
(i) The Ministerial Declaration on Trade in Information Technology
Products
79. In December 1996, the Singapore Ministerial Conference adopted
the Ministerial Declaration on Trade in Information Technology Products.(143) The Declaration, initially agreed by 29 Members (including
the 15 EC member States) and States or separate customs territories in
the process of WTO accession, called on its participants to:
“[B]ind and eliminate customs duties and other duties and charges
of any kind, within the meaning of Article II:1(b) of the General
Agreement on Tariffs and Trade 1994, with respect to the following:
‘(a) all products classified (or classifiable) with Harmonized
System (1996) (‘HS’) headings listed in Attachment A to the Annex to
this Declaration; and
(b) all products specified in Attachment B to the Annex to this
Declaration, whether or not they are included in Attachment A;’
through equal rate reductions of customs duties beginning in 1997 and
concluding in 2000, recognizing that extended staging of reductions and,
before implementation, expansion of product coverage may be necessary in
limited circumstances.”(144)
80. As of 31 December 2004, there were 38 participants (covering 63
Members and States or separate customs territories in the process of
acceding to the WTO) representing approximately 97 per cent of world
trade in information technology products.(145)
(ii) The Committee of Participants on the Expansion of Trade in
Information Technology Products
81. On 26 March 1997, the Participants established the Committee of
Participants on the Expansion of Trade in Information Technology
Products in order to monitor the provisions of paragraphs 3, 5, 6 and 7
of the Annex to the Declaration.(146)
82. At its meeting of 30 October 1997, the Committee of Participants
adopted rules of procedure which are similar to those of other WTO
bodies.(147)
83. At its meeting of 26 October 2000, the Committee of Participants
agreed, on an ad referendum basis, to a Non-Tariff Measures Work
Programme, subject to further consultations with capitals by 10 November
2000. Since no comments were received by this date, the Work Programme
was deemed approved and issued as a formal document.(148)
2. Article II:1(b)
(a) First sentence
(i) “subject to the terms, conditions or qualifications set forth”
84. In EC — Bananas III, addressing the question as to whether the
allocation of tariff quotas as inscribed in a Schedule was inconsistent
with GATT Article XIII, the Appellate Body addressed the legal status of
tariff concessions. The Appellate Body held that “a Member may yield
rights and grant benefits, but it cannot diminish its obligations”:
“With respect to concessions contained in the Schedules annexed to
the GATT 1947, the panel in United States — Restrictions on
Importation of Sugar (“United States — Sugar Headnote”) found
that:
‘… Article II permits contracting parties to incorporate into
their Schedules acts yielding rights under the General Agreement but not
acts diminishing obligations under that Agreement.(149)’
This principle is equally valid for the market access concessions and
commitments for agricultural products contained in the Schedules annexed
to the GATT 1994. The ordinary meaning of the term ‘concessions’
suggests that a Member may yield rights and grant benefits, but it
cannot diminish its obligations. This interpretation is confirmed by
paragraph 3 of the Marrakesh Protocol, which provides:
‘The implementation of the concessions and commitments contained in
the schedules annexed to this Protocol shall, upon request, be subject
to multilateral examination by the Members. This would be without
prejudice to the rights and obligations of Members under Agreements in
Annex 1A of the WTO Agreement. (emphasis added)’”(150)
85. In EC — Poultry, the Appellate Body rejected Brazil’s
argument that the MFN principle in Articles I and
XIII of the GATT 1994
does not necessarily apply to tariff-rate quotas resulting from
compensation negotiations under Article XXVIII of the GATT 1994. In so
doing, the Appellate Body confirmed its finding in EC — Bananas III,
cited in paragraph 84 above, and again referred to paragraph 3 of the
Marrakesh Protocol. The Appellate Body stated:
“In United States — Restrictions on Imports of
Sugar(151) the panel
stated that Article II of the GATT permits contracting parties to
incorporate into their Schedules acts yielding rights under the GATT,
but not acts diminishing obligations under that Agreement. In our view,
this is particularly so with respect to the principle of
non-discrimination in Articles I and
XIII of the GATT 1994. In EC —
Bananas, we confirmed the principle that a Member may yield rights but
not diminish its obligations and concluded that it is equally valid for
the market access concessions and commitments for agricultural products
contained in the Schedules annexed to the GATT 1994.(152) The ordinary
meaning of the term ‘concessions’ suggests that a Member may yield
or waive some of its own rights and grant benefits to other Members, but
that it cannot unilaterally diminish its own obligations. This
interpretation is confirmed by paragraph 3 of the Marrakesh Protocol,
which provides:
‘The implementation of the concessions and commitments contained in
the schedules annexed to this Protocol shall, upon request, be subject
to multilateral examination by the Members. This would be without
prejudice to the rights and obligations of Members under Agreements in
Annex 1A of the WTO Agreement. (emphasis added)’”(153)
86. In
Canada — Dairy, Canada’s Schedule established a quota of
64,500 tons, under which imports were subject to a certain duty, while
out-of-quota imports were subject to a higher duty. Under the heading
“Other terms and conditions”, the Canadian Schedule stated: “This
quantity [64,500] represents the estimated annual cross-border purchases
imported by Canadian consumers.” The United States argued that Canada
violated Article II:1(b) in restricting access to tariff quotas for
fluid milk to cross-border imports by Canadians of (i) consumer packaged
milk for personal use, (ii) valued at less than Can$20. The United
States argued that with respect to those two conditions, Canada was
granting imports of fluid milk treatment less favourable than that
provided for in its Schedule. The Panel found the language contained in
Canada’s Schedule under the heading “Other terms and conditions”
to be a description of the way the size of the quota was determined,
rather than a statement of the conditions as to the kind of imports
qualified to enter Canada under this quota. The Panel found that “…
the ordinary meaning of the word “represent” in this context does
not, in our view, call to mind the setting out of specific restrictions
or conditions”.(154) The Panel added that “[e]ven if the phrase could
be said to include restrictions on access to the tariff-rate quota, we
do not see how the two conditions at issue in this dispute could be read
into this phrase”.(155) As a result, the Panel did not find any
restriction to tariff quotas in Canada’s relevant Schedule, and thus,
agreed with the United States’ argument.(156) The Appellate Body
disagreed with the Panel’s reading of the Schedule and presented the
following interpretation of the term “subject to terms, conditions or
qualifications” contained in Article II:1(b):
“Under Article II:1(b) of the GATT
1994, the market access
concessions granted by a Member are ‘subject to’ the ‘terms,
conditions or qualifications set forth in [its] Schedule’. (emphasis
added) In our view, the ordinary meaning of the phrase ‘subject to’
is that such concessions are without prejudice to and are subordinated
to, and are, therefore, qualified by, any ‘terms, conditions or
qualifications’ inscribed in a Member’s Schedule. We believe that
the relationship between the 64,500 tonnes tariff-rate quota and the ‘Other
Terms and Conditions’ set forth in Canada’s Schedule is of this
nature. The phrase ‘terms and conditions’ is a composite one which,
in its ordinary meaning, denotes the imposition of qualifying
restrictions or conditions. A strong presumption arises that the
language which is inscribed in a Member’s Schedule under the heading,
‘Other Terms and Conditions’, has some qualifying or limiting effect
on the substantive content or scope of the concession or commitment.(157)
In interpreting the language in Canada’s Schedule, the Panel
focused on the verb ‘represents’ and opined that, because of the use
of this verb, the notation was no more than a ‘description’ of the
‘way the size of the quota was determined’.(158) The net consequence
of the Panel’s interpretation is a failure to give the notation in
Canada’s Schedule any legal effect as a ‘term and condition’. If
the language is merely a ‘description’ or a ‘narration’ of how
the quantity was arrived at, we do not see what purpose it serves in
being inscribed in the Schedule. The Panel, in other words, acted upon
the assumption that Canada projected no identifiably necessary or useful
qualifying or limiting purpose in inscribing the notation in its
Schedule. The Panel thus disregarded the principle of effectiveness in
its interpretive effort.
We note that the Panel also adopted an overly literal and narrow view
of the words ‘cross-border purchases imported by Canadian consumers’
in the notation at issue. Moreover, the Panel erred in failing to give
meaning to all of the words in that notation. On the basis of its
ordinary meaning, the Panel stated that the language in the notation
could not refer only to ‘consumer packaged’ milk ‘for personal use’.(159)
(emphasis in original) We do not agree that the ordinary meaning of that
phrase in the notation is so unequivocal. We do not see anything in the
text of the notation which necessarily precludes such an interpretation.
The notation refers to ‘cross-border purchases imported by Canadian
consumers’. It seems, to us, that this language may well be taken to
refer to imports of fluid milk made by Canadian consumers for personal
use in the course of cross-border shopping.”(160)
87. After making the findings referenced in
paragraph 86 above, the
Appellate Body in Canada — Dairy found that while the language
contained in Canada’s Schedule could be said to refer to the
requirement of “consumer packaged milk for personal use”, it could
not refer to the Can$ 50 value limitation. As a result, the Appellate
Body found the latter requirement not to be contained in Canada’s
Schedule and its existence to be inconsistent with Article II:1(b).(161)
88. In US — Certain EC Products, one of the issues was the
consistency of increased bonding requirements imposed on imports with
GATT Article II:1(b), first sentence. See paragraph 69
above.
(ii) Interpretation of tariff concessions in a Schedule
Applicable interpretative rules
89. In
EC — Computer Equipment, the Appellate Body dealt with the
complaint that the reclassification of certain computer equipment was in
violation of the relevant tariff concession of the European Communities,
and therefore inconsistent with Article II. The Appellate Body set forth
the interpretative rules on tariff concessions and, contrary to the
Panel which had based its interpretation of the European Communities’
tariff commitments on the “legitimate expectations” of the exporting
Member(162), it emphasized the
common intentions of the parties:
“The purpose of treaty interpretation under Article 31 of the
Vienna Convention is to ascertain the common intentions of the parties.
These common intentions cannot be ascertained on the basis of the
subjective and unilaterally determined ‘expectations’ of one of the
parties to a treaty. Tariff concessions provided for in a Member’s
Schedule — the interpretation of which is at issue here — are
reciprocal and result from a mutually-advantageous negotiation between
importing and exporting Members. A Schedule is made an integral part of
the GATT 1994 by Article II:7 of the GATT 1994. Therefore, the
concessions provided for in that Schedule are part of the terms of the
treaty. As such, the only rules which may be applied in interpreting the
meaning of a concession are the general rules of treaty interpretation
set out in the Vienna Convention.”(163)
Relevance of “legitimate expectations”
90. In
EC — Computer Equipment, the European Communities appealed
against the Panel’s finding that “the meaning of the term ‘ADP
machines’ in this context [of Article II:1(b)] may be determined in
light of the legitimate expectations of an exporting Member.”(164) In
addition, the Panel found that the United States “was not required to
clarify the scope of the European Communities’ tariff concessions”.(165)
In rejecting the Panel’s finding, the Appellate Body stated as
follows:
“Tariff negotiations are a process of reciprocal demands and
concessions, of ‘give and take’. It is only normal that importing
Members define their offers (and their ensuing obligations) in terms
which suit their needs. On the other hand, exporting Members have to
ensure that their corresponding rights are described in such a manner in
the Schedules of importing Members that their export interests, as
agreed in the negotiations, are guaranteed. There was a special
arrangement made for this in the Uruguay Round. For this purpose, a
process of verification of tariff schedules took place from 15 February
through 25 March 1994, which allowed Uruguay Round participants to check
and control, through consultations with their negotiating partners, the
scope and definition of tariff concessions.(166) Indeed, the fact that
Members’ Schedules are an integral part of the GATT 1994 indicates
that, while each Schedule represents the tariff commitments made by one
Member, they represent a common agreement among all Members.
For the reasons stated above, we conclude that the Panel erred in
finding that ‘the United States was not required to clarify the scope
of the European Communities’ tariff concessions on LAN equipment’.(167)
We consider that any clarification of the scope of tariff concessions
that may be required during the negotiations is a task for all
interested parties.”(168)
91. However, despite its rejection, referenced in
paragraph 90 above,
of the Panel’s interpretative approach to the European Communities’
tariff commitments, the Appellate Body in EC — Computer Equipment
stated that “[w]e do not agree that the Panel has created and applied
a new rule on the burden of proof. The rules on the burden of proof are
those which we clarified in United States — Shirts and Blouses.(169)”(170)
The Appellate Body opined that the Panel’s findings on the “requirement
of clarification” were linked to the Panel’s reliance on “legitimate
expectations” as a means of interpretation of the European Communities’
tariff concessions and “serve[d] to complete and buttress the Panel’s
conclusion that ‘the United States was entitled to legitimate
expectations that LAN equipment would continue to be accorded tariff
treatment as ADP machines in the European Communities’”.(171)
Relevance of Harmonized System/WCO practices
92. On the relevance of the Harmonized System in interpreting tariff
concessions, the Appellate Body in EC — Computer Equipment stated as
follows:
“We note that during the Uruguay Round negotiations, both the
European Communities and the United States were parties to the
Harmonized System. Furthermore, it appears to be undisputed that the
Uruguay Round tariff negotiations were held on the basis of the
Harmonized System’s nomenclature and that requests for, and offers of,
concessions were normally made in terms of this nomenclature. Neither
the European Communities nor the United States argued before the Panel
that the Harmonized System and its Explanatory Notes were relevant in
the interpretation of the terms of Schedule LXXX. We believe, however,
that a proper interpretation of Schedule LXXX should have included an
examination of the Harmonized System and its Explanatory
Notes.”(172)
93. The Appellate Body also discussed the relevance of decisions of
the World Customs Organization (“WCO”) for the interpretation of the
tariff concessions at issue:
“A proper interpretation also would have included an examination of
the existence and relevance of subsequent practice. We note that the
United States referred, before the Panel, to the decisions taken by the
Harmonized System Committee of the WCO in April 1997 on the
classification of certain LAN equipment as ADP machines. Singapore, a
third party in the panel proceedings, also referred to these decisions.
The European Communities observed that it had introduced reservations
with regard to these decisions and that, even if they were to become
final as they stood, they would not affect the outcome of the present
dispute for two reasons: first, because these decisions could not
confirm that LAN equipment was classified as ADP machines in 1993 and
1994; and, second, because this dispute ‘was about duty treatment and
not about product classification’. We note that the United States
agrees with the European Communities that this dispute is not a dispute
on the correct classification of LAN equipment, but a dispute on whether
the tariff treatment accorded to LAN equipment was less favourable than
that provided for in Schedule LXXX. However, we consider that in
interpreting the tariff concessions in Schedule LXXX, decisions of the
WCO may be relevant; and, therefore, they should have been examined by
the Panel.”(173)
Relevance of prior practice in tariff classification
94. In
EC — Computer Equipment, in its interpretation of the tariff
concessions at issue, the Appellate Body found that the terms of the
relevant Schedule were ambiguous. In continuing its analysis, the
Appellate Body discussed the relevance of tariff classification practice
of Members to the interpretation of tariff concessions as follows:
“In the light of our observations on ‘the circumstances of [the]
conclusion’ of a treaty as a supplementary means of interpretation
under Article 32 of the Vienna Convention, we consider that the
classification practice in the European Communities during the Uruguay
Round is part of ‘the circumstances of [the] conclusion’ of the WTO
Agreement and may be used as a supplementary means of interpretation
within the meaning of Article 32 of the Vienna Convention.”(174)
95. However, the Appellate Body added the following caveat regarding
the relevance of prior practice on tariff classification:
“The purpose of treaty interpretation is to establish the
common
intention of the parties to the treaty. To establish this intention, the
prior practice of only one of the parties may be relevant, but it is
clearly of more limited value than the practice of all parties. In the
specific case of the interpretation of a tariff concession in a
Schedule, the classification practice of the importing Member, in fact,
may be of great importance.”(175)
96. Also, the Appellate Body in
EC — Computer Equipment denied the
relevance of inconsistent practice for the interpretation of tariff
concessions. In addition, the Appellate Body pointed to the fact that
the Panel on EC — Computer Equipment had focused on only two member
States of the European Communities:
“Consistent prior classification practice may often be significant.
Inconsistent classification practice, however, cannot be relevant in
interpreting the meaning of a tariff concession. …
… [T]he Panel identified Ireland and the United Kingdom as the ‘largest’
and ‘major’ market for LAN equipment exported from the United
States. On the basis of this assumption, the Panel gave special
importance to the classification practice by customs authorities in
these two Member States. However, the European Communities constitutes a
customs union, and as such, once goods are imported into any Member
State, they circulate freely within the territory of the entire customs
union. The export market, therefore, is the European Communities, not an
individual Member State.”(176)
(iii) “ordinary customs duties”
97. As regards the concept of ordinary customs duty, the Appellate
Body in Chile — Price Band System, reversed the Panel’s
interpretation of this concept with respect to Article 4 of the Agreement on Agriculture and Article II.1(b) first sentence of GATT
1994. See Section V.B.3 of the Chapter on the Agreement on
Agriculture.
(iv) “in excess of”
Specific import duties under tariff concessions made on an ad valorem
basis
98. In
Argentina — Textiles and Apparel, the measure at issue was a
minimum specific import duty (the so-called “DIEM”) imposed by
Argentina on footwear, textiles and apparel. Argentina’s Schedule
included a bound rate of duty of 35 per cent ad valorem with respect to
the above-mentioned goods. In practice, textiles and apparel were
subject to the higher of either (i) a 35 per cent ad valorem duty or
(ii) the minimum specific duty. The Panel found the Argentine specific
duty to be a violation of Article II for two reasons: First, the Panel
found that Argentina had acted inconsistently with Article II simply by
virtue of applying a different type of import duty than set out in its
Schedule, independently of whether the ad valorem equivalent of the
specific duty in fact exceeded the bound ad valorem rate.(177) In making
this finding, the Panel relied on past GATT practice which it found to
be “clear”.(178) Second, the Panel found a violation of
Article II in
the fact that the minimum specific import duty in certain cases exceeded
the bound 35 per cent ad valorem duty.(179) The Appellate Body modified
the findings of the Panel. In so doing, the Appellate Body disagreed
with the Panel about the clarity of past GATT practice and focused, in
its analysis, on the terms of Article II. The Appellate Body first
addressed the Panel’s finding that merely by applying a type of duty
different from the type provided for in a Member’s Schedule, that
Member acted inconsistently with Article II:
“A tariff binding in a Member’s Schedule provides an upper limit
on the amount of duty that may be imposed, and a Member is permitted to
impose a duty that is less than that provided for in its Schedule. The
principal obligation in the first sentence of Article II:1(b), as we
have noted above, requires a Member to refrain from imposing ordinary
customs duties in excess of those provided for in that Member’s
Schedule. However, the text of Article II:1(b), first sentence, does not
address whether applying a type of duty different from the type provided
for in a Member’s Schedule is inconsistent, in itself, with that
provision.”(180)
99. After finding that the text of
Article II:1(b) did not address
the question whether a violation of Article II could result merely from
the application a type of duty different from the type of duty provided
for in a Member’s Schedule, the Appellate Body in Argentina — Textiles and Apparel addressed the question whether Argentina had
applied customs duties in excess of those provided for in its Schedule:
“[T]he application of a type of duty different from the type
provided for in a Member’s Schedule is inconsistent with Article II:1(b), first sentence, of the GATT 1994 to the extent that it results
in ordinary customs duties being levied in excess of those provided for
in that Member’s Schedule. In this case, we find that Argentina has
acted inconsistently with its obligations under Article II:1(b), first
sentence, of the GATT 1994, because the DIEM regime, by its structure
and design, results, with respect to a certain range of import prices in
any relevant tariff category to which it applies, in the levying of
customs duties in excess of the bound rate of 35 per cent ad valorem in
Argentina’s Schedule.”(181)
100. In reaching this conclusion, the Appellate Body in
Argentina —
Textiles and Apparel pointed out the possibility of a price sufficiently
low to render the ad valorem equivalent of the DIEM greater than 35 per
cent:
“[W]e may generalize that under the Argentine system, whether the
amount of the DIEM is determined by applying 35 per cent, or a rate less
than 35 per cent, to the representative international price, there will
remain the possibility of a price that is sufficiently low to produce an
ad valorem equivalent of the DIEM that is greater than 35 per cent. In
other words, the structure and design of the Argentine system is such
that for any DIEM, no matter what ad valorem rate is used as the
multiplier of the representative international price, the possibility
remains that there is a ‘break-even’ price below which the ad
valorem equivalent of the customs duty collected is in excess of the
bound ad valorem rate of 35 per cent.
We note that it is possible, under certain circumstances, for a
Member to design a legislative ‘ceiling’ or ‘cap’ on the level
of duty applied which would ensure that, even if the type of duty
applied differs from the type provided for in that Member’s Schedule,
the ad valorem equivalents of the duties actually applied would not
exceed the ad valorem duties provided for in the Member’s Schedule.
However, no such “ceiling” exists in this case. The measures at
issue here, as we have already noted, specifically and expressly require
Argentine customs officials to collect the greater of the ad valorem or
the specific duties applicable, with no upper limit on the level of the
ad valorem equivalent of the specific duty that may be imposed. Before
the Panel, Argentina argued that its domestic challenge procedure (recurso
de impugnación), in combination with the precedence and direct effect
of international treaty obligations in the Argentine national legal
system, operated as an effective legislative ‘ceiling’ to ensure
that a duty in excess of the bound rate of 35 per cent ad valorem could
never actually be imposed. The Panel did not accept this argument, and
Argentina has not appealed from that finding of the Panel. In this case,
therefore, there is no effective legislative ‘ceiling’ in the
Argentine system which ensures that duties in excess of the bound rate
of 35 per cent ad valorem will not be applied.”(182)
(b) Article II:1(b) Second sentence
101. The Appellate Body on
Chile — Price Band System reversed the
Panel’s finding that the duties resulting from Chile’s price band
system constituted a violation of the second sentence of Article II:1(b), because no claim had been made under that provision, and
therefore the Panel had acted inconsistently with Article 11 of the DSU.(183) See Section XI.B(2)(a)(ii)
of the Chapter on the DSU.
102. The Appellate Body on
Chile — Price Band System, in examining
the concept of ordinary customs duties under Article 4.2 of the
Agreement on Agriculture, referred to Article II:1(b)
second sentence of
the GATT 1994. See Section V.B.2 of the Chapter on the Agreement on
Agriculture.
3. Relationship between paragraphs 1(a) and 1(b)
103. In Argentina — Textiles and Apparel, in addressing the
consistency with GATT Article II of certain minimum specific duties
imposed on textiles and apparel, the Appellate Body described the
relationship between paragraphs (a) and (b) of Article II:1 as follows:
“The terms of Article II:1(a) require that a Member ‘accord to
the commerce of the other Members treatment no less favourable than that
provided for’ in that Member’s Schedule. Article II:1(b), first
sentence, states, in part: ‘The products described in Part I of the
Schedule … shall, on their importation into the territory to which the
Schedule relates, … be exempt from ordinary customs duties in excess
of those set forth and provided therein.’ Paragraph (a) of Article
II:1 contains a general prohibition against according treatment less
favourable to imports than that provided for in a Member’s Schedule.
Paragraph (b) prohibits a specific kind of practice that will always be
inconsistent with paragraph (a): that is, the application of ordinary
customs duties in excess of those provided for in the Schedule. Because
the language of Article II:1(b), first sentence, is more specific and
germane to the case at hand, our interpretative analysis begins with,
and focuses on, that provision.”(184)
4. Article II:5
104. In
EC — Computer Equipment, the Appellate Body rejected the
Panel’s finding that Article II:5 confirmed the relevance of “legitimate
expectations” of the exporting Member for interpreting tariff
concessions of the importing Member:
“[W]e reject the Panel’s view that Article II:5 of the GATT 1994
confirms that ‘legitimate expectations are a vital element in the
interpretation’ of Article II:1 of the GATT 1994 and of Members’ Schedules.
It is clear from the wording of Article II:5 that it does not support
the Panel’s view. This paragraph recognizes the possibility that the
treatment contemplated in a concession, provided for in a Member’s
Schedule, on a particular product, may differ from the treatment
accorded to that product and provides for a compensatory mechanism to
rebalance the concessions between the two Members concerned in such a
situation. However, nothing in Article II:5 suggests that the
expectations of only the exporting Member can be the basis for
interpreting a concession in a Member’s Schedule for the purposes of
determining whether that Member has acted consistently with its
obligations under Article II:1. In discussing
Article II:5, the Panel
overlooked the second sentence of that provision, which clarifies that
the ‘contemplated treatment’ referred to in that provision is the
treatment contemplated by both Members.”(185)
5. Article II:7
105. In EC — Computer Equipment, the Appellate Body considered that
“[a] Schedule is made an integral part of the GATT 1994 by Article
II:7 of the GATT 1994”. The Appellate Body thus concluded that “the
concessions provided for in that Schedule are part of the terms of the
treaty”.(186) In this regard, see
paragraph 89 above.
D. Relationship with other Articles
1. General
106. In EC — Bananas III, the Appellate Body, discussing whether
tariff concessions for agricultural products can deviate from Article
XIII of GATT 1994, emphasized that in their Schedules, Members may yield
their rights, but may not diminish their obligations under GATT 1994.
See paragraph 84 above.
2. Article III
107. In EC — Bananas III, the Appellate Body rejected the argument
that Article III:4 of the GATT 1994 did not cover the EC licensing
system for the allocation of tariff quotas for imports of bananas
because it was a border measure. See paragraphs 125 and
285 below.
108. In Korea — Various Measures on Beef, after finding that the
practice of the Korean state trading agency for beef of treating
grass-fed beef and grain-fed beef differently was inconsistent with GATT
Articles XI and II:1(a), the Panel, in a finding not reviewed by the
Appellate Body, did not “find it necessary to address Australia’s
claims that the same measures also violate Articles III:4 and
XVII of GATT.”(187)
3. Article XI
109. The majority of the Panel on US — Certain EC Products decided
that the United States’ bonding requirements on imports from the
European Communities fell within the scope of Article II of GATT
1994;
in a separate opinion, one panelist, whose identity remained
confidential pursuant to Article 14.3 of the DSU, expressed the view
that the increased bonding requirement was subject to, and inconsistent
with, Article XI. The Appellate Body reversed the finding of the Panel.
See paragraph 69 above, and footnote
126.
4. Article XIII
110. Following the finding referenced in
paragraph 106 above, the
Appellate Body in EC — Bananas III addressed whether the Agreement on
Agriculture permits market access concessions on agricultural products
to be inconsistent with Article XIII of GATT 1994. In so doing, the
Appellate Body addressed the relationship between the Agreement on
Agriculture and GATT 1994 and found that Article XIII of GATT 1994 was
applicable to such concessions:
“The question remains whether the provisions of the
Agreement on
Agriculture allow market access concessions on agricultural products to
deviate from Article XIII of the GATT
1994. The preamble of the Agreement on Agriculture states that it establishes ‘a basis for
initiating a process of reform of trade in agriculture’ and that this
reform process ‘should be initiated through the negotiation of
commitments on support and protection and through the establishment of
strengthened and more operationally effective GATT rules and disciplines’.
The relationship between the provisions of the GATT 1994 and of the
Agreement on Agriculture is set out in Article 21.1 of the Agreement on
Agriculture:
‘The provisions of GATT 1994 and of other Multilateral Trade
Agreements in Annex 1A to the WTO Agreement shall apply subject to the
provisions of this Agreement.’
Therefore, the provisions of the GATT 1994, including
Article XIII,
apply to market access commitments concerning agricultural products,
except to the extent that the Agreement on Agriculture contains specific
provisions dealing specifically with the same matter.”(188)
111. In EC — Bananas III, the Panel also found that the European
Communities’ import regime for bananas was inconsistent with Article XIII of GATT 1994 in that the European Communities allocated tariff
quota shares to some Members without allocating such shares to other
Members. In doing so, with respect to the relationship between Articles
II and XIII, the Panel stated as follows:
“The panel in the Sugar Headnote case found that qualifications on
tariff bindings do not override other GATT provisions after an analysis
of the wording of Article II, its object, purpose and context, and the
drafting history of the provision. Although it made no mention of the
Vienna Convention, it seems to have followed closely Articles 31 and 32
thereof. …(189)
…
We agree with the analysis of the Sugar Headnote panel report and
note that Article II was not changed in any relevant way as a result of
the Uruguay Round. Thus, based on the Sugar Headnote case, we conclude
that the EC’s inclusion of allocations inconsistent with the
requirements of Article XIII in its Schedule does not prevent them from
being challenged by other Members. We note in this regard that the
Uruguay Round tariff schedules were prepared with full knowledge of the
Sugar Headnote panel report, which was adopted by the GATT CONTRACTING
PARTIES in the middle of the Round (June 1989).”(190)
5. Article XVII
112. In Korea — Various Measures on Beef, after finding that the
practice of the Korean state trading agency for beef of treating
grass-fed beef and grain-fed beef differently was inconsistent with GATT
Articles XI and II:1(a), the Panel, in a finding not reviewed by the
Appellate Body, did not “find it necessary to address Australia’s
claims that the same measures also violate Article XVII of GATT”(191).
E. Exceptions and Derogations from Article II
1. Waivers
113. A number of waivers of a “collective” or individual nature
have been granted to enable Members to implement the HS changes
domestically and undertake Article XXVIII negotiations, subsequently, if
required. With respect to these waivers, see the Chapter on the WTO
Agreement.
F. Relationship with other WTO Agreements
1. Agreement on Agriculture
114. The Appellate Body on
Chile — Price Band System, in examining
the concept of ordinary customs duties under Article 4.2 of the
Agreement on Agriculture, referred to Article II:1(b) of GATT
1994. See
Section V.B.3 of the Chapter on the Agreement on Agriculture. The
Appellate Body also indicated that if it were to find that Chile’s
price band system was inconsistent with Article 4.2 of the Agreement of
Agriculture, it would not need to make a separate finding on whether
Chile’s price band system also results in a violation of Article
II:1(b) of the GATT 1994 to resolve this dispute.(192)
2. Licensing Agreement
115. In
Canada — Dairy, the Panel decided not to examine a claim
that Canada violated Article 3 of the Licensing Agreement in that it
restricted access to tariff-rate quotas for imports of fluid milk to
Canadians of consumer packaged milk for personal use, valued less than
Can$20, after having found the Canadian measure inconsistent with GATT Article II:1(b)
(see paragraph 86 above).(193) See Chapter on the
Licensing Agreement, paragraph 33.
PART II
IV. Article III
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A. Text of Article III
Article III: National Treatment on Internal Taxation and Regulation
1.
The contracting parties recognize that internal taxes and other internal
charges, and laws, regulations and requirements affecting the internal
sale, offering for sale, purchase, transportation, distribution or use
of products, and internal quantitative regulations requiring the
mixture, processing or use of products in specified amounts or
proportions, should not be applied to imported or domestic products so
as to afford protection to domestic production.
2. The products of the territory of any contracting party imported
into the territory of any other contracting party shall not be subject,
directly or indirectly, to internal taxes or other internal charges of
any kind in excess of those applied, directly or indirectly, to like
domestic products. Moreover, no contracting party shall otherwise apply
internal taxes or other internal charges to imported or domestic
products in a manner contrary to the principles set forth in paragraph
1.
3. With respect to any existing internal tax which is inconsistent
with the provisions of paragraph 2, but which is specifically authorized
under a trade agreement, in force on April 10, 1947, in which the import
duty on the taxed product is bound against increase, the contracting
party imposing the tax shall be free to postpone the application of the
provisions of paragraph 2 to such tax until such time as it can obtain
release from the obligations of such trade agreement in order to permit
the increase of such duty to the extent necessary to compensate for the
elimination of the protective element of the tax.
4. The products of the territory of any contracting party imported
into the territory of any other contracting party shall be accorded
treatment no less favourable than that accorded to like products of
national origin in respect of all laws, regulations and requirements
affecting their internal sale, offering for sale, purchase,
transportation, distribution or use. The provisions of this paragraph
shall not prevent the application of differential internal
transportation charges which are based exclusively on the economic
operation of the means of transport and not on the nationality of the
product.
5. No contracting party shall establish or maintain any internal
quantitative regulation relating to the mixture, processing or use of
products in specified amounts or proportions which requires, directly or
indirectly, that any specified amount or proportion of any product which
is the subject of the regulation must be supplied from domestic sources.
Moreover, no contracting party shall otherwise apply internal
quantitative regulations in a manner contrary to the principles set
forth in paragraph 1.
6. The provisions of paragraph 5 shall not apply to any internal
quantitative regulation in force in the territory of any contracting
party on July 1, 1939, April 10, 1947, or March 24, 1948, at the option
of that contracting party; Provided that any such regulation which is
contrary to the provisions of paragraph 5 shall not be modified to the
detriment of imports and shall be treated as a customs duty for the
purpose of negotiation.
7. No internal quantitative regulation relating to the mixture,
processing or use of products in specified amounts or proportions shall
be applied in such a manner as to allocate any such amount or proportion
among external sources of supply.
8. (a) The provisions of this Article shall not apply to laws,
regulations or requirements governing the procurement by governmental
agencies of products purchased for governmental purposes and not with a
view to commercial resale or with a view to use in the production of
goods for commercial sale.
(b)
The provisions of this Article shall not prevent the payment of
subsidies exclusively to domestic producers, including payments to
domestic producers derived from the proceeds of internal taxes or
charges applied consistently with the provisions of this Article and
subsidies effected through governmental purchases of domestic products.
9. The contracting parties recognize that internal maximum price
control measures, even though conforming to the other provisions of this
Article, can have effects prejudicial to the interests of contracting
parties supplying imported products. Accordingly, contracting parties
applying such measures shall take account of the interests of exporting
contracting parties with a view to avoiding to the fullest practicable
extent such prejudicial effects.
10. The provisions of this Article shall not prevent any contracting
party from establishing or maintaining internal quantitative regulations
relating to exposed cinematograph films and meeting the requirements of
Article IV.
B. Text of Ad Article III
Ad Article III
Any internal tax or other internal charge, or any law, regulation or
requirement of the kind referred to in paragraph 1 which applies to an
imported product and to the like domestic product and is collected or
enforced in the case of the imported product at the time or point of
importation, is nevertheless to be regarded as an internal tax or other
internal charge, or a law, regulation or requirement of the kind
referred to in paragraph 1, and is accordingly subject to the provisions
of Article III.
Paragraph 1
The application of paragraph 1 to internal taxes imposed by local
governments and authorities with the territory of a contracting party is
subject to the provisions of the final paragraph of Article XXIV. The
term “reasonable measures” in the last-mentioned paragraph would not
require, for example, the repeal of existing national legislation
authorizing local governments to impose internal taxes which, although
technically inconsistent with the letter of Article
III, are not in fact
inconsistent with its spirit, if such repeal would result in a serious
financial hardship for the local governments or authorities concerned.
With regard to taxation by local governments or authorities which is
inconsistent with both the letter and spirit of Article
III, the term
“reasonable measures” would permit a contracting party to eliminate
the inconsistent taxation gradually over a transition period, if abrupt
action would create serious administrative and financial difficulties.
Paragraph 2
A tax conforming to the requirements of the first sentence of
paragraph 2 would be considered to be inconsistent with the provisions
of the second sentence only in cases where competition was involved
between, on the one hand, the taxed product and, on the other hand, a
directly competitive or substitutable product which was not similarly
taxed.
Paragraph 5
Regulations consistent with the provisions of the first sentence of
paragraph 5 shall not be considered to be contrary to the provisions of
the second sentence in any case in which all of the products subject to
the regulations are produced domestically in substantial quantities. A
regulation cannot be justified as being consistent with the provisions
of the second sentence on the ground that the proportion or amount
allocated to each of the products which are the subject of the
regulation constitutes an equitable relationship between imported and
domestic products.
C. Interpretation and Application of Article III
1. General
(a) Purpose of Article III
(i) Avoidance of protectionism in the application of internal
measures
116. In examining the consistency of the Japanese taxation on liquor
products with Article III, the Appellate Body in Japan — Alcoholic
Beverages II explained the purpose of Article III in the following
terms:
“The broad and fundamental purpose of Article III is to avoid
protectionism in the application of internal tax and regulatory
measures. More specifically, the purpose of Article III ‘is to ensure
that internal measures “not be applied to imported or domestic
products so as to afford protection to domestic production’’’.(194)
Toward this end, Article III obliges Members of the WTO to provide
equality of competitive conditions for imported products in relation to
domestic products.(195)‘[T]he intention of the drafters of the Agreement
was clearly to treat the imported products in the same way as the like
domestic products once they had been cleared through customs. Otherwise
indirect protection could be given’.(196)”(197)
117. The Appellate Body repeatedly cited its finding referenced in
paragraph 116 above. (198)
Further, in Korea — Alcoholic Beverages, the
Appellate Body added:
“In view of the objectives of avoiding protectionism, requiring
equality of competitive conditions and protecting expectations of equal
competitive relationships, we decline to take a static view of the term
‘directly competitive or substitutable’.”(199)
118. Also, in
Canada — Periodicals, the Appellate Body added:
“The fundamental purpose of Article III of the GATT 1994 is to
ensure equality of competitive conditions between imported and like
domestic products.(200)”(201)
119. In
Argentina — Hides and Leather, the Panel referred to the
findings of the Appellate Body referenced in paragraphs 116-118
above,
and stated that “Article III:2, first sentence, is not concerned with
taxes or changes as such or the policy purposes Members pursue with
them, but with their economic impact on the competitive opportunities of
imported and like domestic products.”(202) See also
paragraph 176 below.
(ii) Protection of tariff commitments under Article III/Relevance of
tariff concessions
120. In Japan — Alcoholic Beverages II, the Panel held that “one
of the main purposes of Article III is to guarantee that WTO Members
will not undermine through internal measures their commitments under
Article II.”(203) Although the Appellate Body agreed about the
significance of Article III with respect to tariff concessions, it
emphasized that the purpose of Article III was broader:
“The broad purpose of Article III of avoiding protectionism must be
remembered when considering the relationship between Article III and
other provisions of the WTO Agreement. Although the protection of
negotiated tariff concessions is certainly one purpose of Article
III,
the statement in Paragraph 6.13 of the Panel Report that ‘one of the
main purposes of Article III is to guarantee that WTO Members will not
undermine through internal measures their commitments under Article II’
should not be overemphasized. The sheltering scope of Article III is not
limited to products that are the subject of tariff concessions under
Article II. The Article III national treatment obligation is a general
prohibition on the use of internal taxes and other internal regulatory
measures so as to afford protection to domestic production. This
obligation clearly extends also to products not bound under Article
II.
This is confirmed by the negotiating history of Article
III.”(204)
(iii) Comparison with competition law
121. In
Korea — Alcoholic Beverages, the Panel, in a statement
subsequently not addressed by the Appellate Body, considered that it is
not necessary to use the same criteria for defining markets under
Article III:2 as under competition law. The Panel stated:
“While the specifics of the interaction between trade and
competition law are still being developed, we concur that the market
definitions need not be the same. Trade law generally, and Article III
in particular, focuses on the promotion of economic opportunities for
importers through the elimination of discriminatory governmental
measures which impair fair international trade. Thus, trade law
addresses the issue of the potentiality to compete. Antitrust law
generally focuses on firms’ practices or structural modifications
which may prevent or restrain or eliminate competition. It is not
illogical that markets be defined more broadly when implementing laws
primarily designed to protect competitive opportunities than when
implementing laws designed to protect the actual mechanisms of
competition. In our view, it can thus be appropriate to utilize a
broader concept of markets with respect to Article
III:2, second
sentence, than is used in antitrust law. We also take note of the
developments under European Community law in this regard. For instance,
under Article 95 of the Treaty of Rome, which is based on the language
of Article III, distilled alcoholic beverages have been considered
similar or competitive in a series of rulings by the European Court of
Justice (‘ECJ’).(205) On the other hand, in examining a merger under
the European Merger Regulation,(206) the Commission of the European
Communities found that whisky constituted a separate market.(207)
Similarly, in an Article 95 case, bananas were considered in competition
with other fruits.(208) However, under EC competition law, bananas
constituted a distinct product market.(209) We are mindful that the Treaty
of Rome is different in scope and purpose from the General Agreement,
the similarity of Article 95 and Article III, notwithstanding.
Nonetheless, we observe that there is relevance in examining how the ECJ
has defined markets in similar situations to assist in understanding the
relationship between the analysis of non-discrimination provisions and
competition law.(210)”(211)
(iv) Reference to GATT practice
122. With respect to GATT practice on this subject-matter.
(b) Scope of application — measures imposed at the time or point of
importation
123. In
Argentina — Hides and Leather, the Panel addressed the
question whether Argentine fiscal provisions concerning pre-payment of a
value added tax, applied to imported goods at the time of their
importation, were nevertheless to be considered “internal measures”
within the meaning of Article III:2. The Panel addressed in particular
Note Ad Article
III, which sets forth that a measure applied to a
product at the time of importation is nevertheless an internal measure
within the meaning of Article III if this measure is also imposed on the
like domestic product:
“RG 3431 [the value-added tax measure
applicable to imported goods] applies to definitive import transactions,
but only if the products imported are subsequently resold in the
internal Argentinean market. In other words, RG 3431 provides for the
pre-payment of the IVA chargeable to an internal transaction. It should
also be pointed out that the fact that RG 3431 is collected at the time
and point of importation does not preclude it from qualifying as an
internal tax measure.”(212)
124. While the parties to the
Argentina — Hides and Leather dispute
agreed that RG 3543, another Argentine tax measure imposing a collection
regime of income taxes with respect to import transactions, was an
internal measure within the meaning of Article III, they disagreed with
respect to the question whether the same tax regime existed for domestic
goods, i.e. whether RG 2784, the income tax measure applicable with
respect to domestic transactions, was the “internal analogue” of RG
3431. While RG 3543 established a collection regime and defined the
purchaser as the taxable person, RG 2784 established a withholding
regime and defined the seller as the taxable person. The Panel did not
consider these differences significant enough for the Argentine regime
to fall outside the scope the Note Ad Article
III:
“[I]t is clear that the fact that RG 3543 creates a collection
regime and not a withholding regime does not establish, in itself, that
RG 2784 is not equivalent to RG 3543. The use of a different method of
taxation may be justified by objective reasons. In this regard, it seems
logical to us to collect pre-payments of an income tax from the sellers
of a product, as indeed RG 2784 envisages. As we understand it, RG 3543
does not do so, inter alia, because foreign sellers are not normally
subject to income taxation in Argentina. In those circumstances,
Argentina apparently saw fit to adjust for the adverse competitive
effect of RG 2784 on domestic products by collecting pre-payments from
importers in accordance with RG 3543.
…
For these reasons, we find that RG 3543 establishes a mechanism for
the collection of the IG at the border which is equivalent in nature to
the IG withholding mechanism established by RG 2784. In accordance with
the Note Ad Article
III, we therefore conclude that RG 3543 is an
internal measure within the meaning of Article III:2.”(213)
125. In EC — Bananas III, the Appellate Body found the EC import
licensing system for bananas inconsistent with Article
III:4. The
European Communities claimed that Article III:4 was not applicable to
the import licensing system because it was a border measure. The
Appellate Body replied as follows:
“At issue in this appeal is not whether any import licensing
requirement, as such, is within the scope of Article
III:4, but whether
the EC procedures and requirements for the distribution of import
licences for imported bananas among eligible operators within the
European Communities are within the scope of this provision. The EC
licensing procedures and requirements include the operator category
rules, under which 30 per cent of the import licences for third-country
and non-traditional ACP bananas are allocated to operators that market
EC or traditional ACP bananas, and the activity function rules, under
which Category A and B licences are distributed among operators on the
basis of their economic activities as importers, customs clearers or
ripeners. These rules go far beyond the mere import licence requirements
needed to administer the tariff quota for third-country and
non-traditional ACP bananas or Lomé Convention requirements for the
importation of bananas. These rules are intended, among other things, to
cross-subsidize distributors of EC (and ACP) bananas and to ensure that
EC banana ripeners obtain a share of the quota rents. As such, these
rules affect ‘the internal sale, offering for sale, purchase, …’
within the meaning of Article III:4, and therefore fall within the scope
of this provision. Therefore, we agree with the conclusion of the Panel
on this point.”(214)
(i) State trading enterprises
126. In Korea — Various Measures on Beef, the Panel recognized that
where a state trading enterprise has a monopoly over both importation
and distribution of goods, a blurring may occur of the traditional
distinction between measures affecting imported products and measures
affecting importation:
“Based on the panel findings in the Canada — Marketing Agencies
(1988) case, the Panel considers that to the extent that LPMO fully
controls both the importation and distribution of its 30 per cent share
of Korean beef quota, the distinction normally made in the GATT between
restrictions affecting the importation of products (i.e. border
measures) and restrictions affecting imported products (i.e. internal
measures) loses much of its significance.”(215)
(ii) Reference to GATT practice
127. With respect to GATT practice on this subject-matter.
(c) Relevance of policy purpose of internal measures / “aims-and-effects”
test
128.
With respect to the relevance of policy purposes of subject
internal measures, in Japan — Alcoholic Beverages II, the Appellate
Body stated as follows:
“Members of the WTO are free to pursue their own domestic goals
through internal taxation or regulation so long as they do not do so in
a way that violates Article III or any of the other commitments they
have made in the WTO Agreement.”(216)
129. In this respect, in
Argentina — Hides and Leather, the Panel
stated that “[i]t must be stated … that the applicability of Article
III:2 is not conditional upon the policy purpose of a tax measure.(217)”(218)
See also paragraph 119 above.
130. In Japan — Alcoholic Beverages II, the Panel, in a finding
subsequently upheld by the Appellate Body, explicitly rejected the
so-called “aims-and-effects” test. The Panel summarized the parties’
arguments for the “aims-and-effects” test as follows:
“Japan … essentially argued that the Panel should examine the
contested legislation in the light of its aim and effect in order to
determine whether or not it is consistent with Article
III:2. According
to this view, in case the aim and effect of the contested legislation do
not operate so as to afford protection to domestic production, no
inconsistency with Article III:2 can be established. … [T]he United
States … essentially argued that, in determining whether two products
that were taxed differently under a Member’s origin-neutral tax
measure were nonetheless ‘like products’ for the purposes of Article
III:2, the Panel should examine not only the similarity in physical
characteristics and end-uses, consumer tastes and preferences, and
tariff classifications for each product, but also whether the tax
distinction in question was ‘applied … so as to afford protection to
domestic production’: that is, whether the aim and effect of that
distinction, considered as a whole, was to afford protection to domestic
production. According to this view, if the tax distinction in question
is not being applied so as to afford protection to domestic production,
the products between which the distinction is drawn are not to be deemed
‘like products’ for the purpose of Article
III:2.”(219)
131. In upholding the rejection by the Panel of the “aims-and-effects”
test under Article III:2, first sentence, the Appellate Body, in Japan
— Alcoholic Beverages II, found that the policy purpose of a tax
measure (the “aim” of a measure”) was not relevant for the purpose
of Article III:2, first sentence:
“Article III:2, first sentence does not refer specifically to
Article III:1. There is no specific invocation in this first sentence of
the general principle in Article III:1 that admonishes Members of the
WTO not to apply measures ‘so as to afford protection’. This
omission must have some meaning. We believe the meaning is simply that
the presence of a protective application need not be established
separately from the specific requirements that are included in the first
sentence in order to show that a tax measure is inconsistent with the
general principle set out in the first sentence. However, this does not
mean that the general principle of Article III:1 does not apply to this
sentence. To the contrary, we believe the first sentence of Article
III:2 is, in effect, an application of this general principle. … If
the imported and domestic products are ‘like products’, and if the
taxes applied to the imported products are ‘in excess of’ those
applied to the domestic like products, then the measure is inconsistent
with Article III:2, first sentence.”(220)
132. Also, in EC — Bananas III, the Appellate Body rejected the “aims-and-effects”
test under both Article II and Article XVII of the
GATS.(221) See Chapter
on the GATS, Section XXI.B.3.
133. With respect to this topic, see also
paragraph 219 below.
(i) Reference to GATT practice
134. With respect to GATT practice on this subject-matter, see GATT
Analytical Index, page 127.
(d) Relevance of trade effects
135. In Japan — Alcoholic Beverages II, the Appellate Body
addressed the relevance of the trade effects of measures falling under
the scope of Article III:
“[I]t is irrelevant that ‘the trade effects’ of the tax
differential between imported and domestic products, as reflected in the
volumes of imports, are insignificant or even non-existent; Article III
protects expectations not of any particular trade volume but rather of
the equal competitive relationship between imported and domestic
products.(222)”(223)
136.
The Appellate Body reiterated this approach in
Canada — Periodicals:
“It is a well-established principle that the trade effects of a
difference in tax treatment between imported and domestic products do
not have to be demonstrated for a measure to be found to be inconsistent
with Article III.(224)”(225)
(i) Reference to GATT practice
137.
With respect to GATT practice on this subject-matter.
(e) State trading monopolies
138. In Korea — Various Measures on Beef, the Panel addressed the
relationship between Article XVII, the provision on state trading
enterprises, and Article III. Finding support for its conclusions in
GATT practice, the Panel held:
“Article XVII.1(a) establishes the general obligation on state
trading enterprises to undertake their activities in accordance with the
GATT principles of non-discrimination. The Panel considers that this
general principle of non-discrimination includes at least the provisions
of Articles I and III of
GATT.
…
… A conclusion that the principle of non-discrimination was
violated would suffice to prove a violation of Article
XVII.”(226)
(i) Reference to GATT practice
139. With respect to GATT practice on this subject-matter.
2. Article III:1
(a) Relationship between paragraph 1 and paragraphs 2, 4 and 5
140. In
US — Gasoline, in a finding subsequently not addressed by
the Appellate Body, the Panel examined whether a US gasoline regulation
treated imported gasoline in a manner inconsistent with Article
III:1.
In response to the US argument that Article III:1 “could not form the
basis of a violation”(227), the Panel answered as follows:
“The Panel examined first whether, after making a finding of
inconsistency with Article III:4, it should make a finding under
Article III:1. The Panel noted that the panel in the Malt Beverages case had
examined a claim made under paragraphs 1, 2 and
4 of Article III. That
panel had concluded that ‘because Article III:1 is a more general
provision than either Article III:2 or III:4, it would not be
appropriate for the Panel to consider [the complainant’s] Article III:1 allegations to the extent that the Panel were to find [the
respondent’s] measures to be inconsistent with the more specific
provisions of Articles III:2 and III:4.’(228) The present Panel agreed
with this reasoning, and therefore did not find it necessary to examine
the consistency of the Gasoline Rule with Article III:1.”(229)
141. In Japan — Alcoholic Beverages II, the Appellate Body examined
the Panel’s finding of inconsistency of the Japanese Liquor Tax Law
with both sentences of Article III:2. With respect to the legal status
of Article III:1, the Appellate Body invoked the principle of effective
treaty interpretation and found that Article III:1 constitutes part of
the context for Article III:2:
“The terms of Article III must be given their ordinary meaning —
in their context and in the light of the overall object and purpose of
the WTO Agreement. Thus, the words actually used in the Article provide
the basis for an interpretation that must give meaning and effect to all
its terms. The proper interpretation of the Article is, first of all, a
textual interpretation. Consequently, the Panel is correct in seeing a
distinction between Article III:1, which ‘contains general principles’,
and Article III:2, which ‘provides for specific obligations regarding
internal taxes and internal charges’. Article III:1 articulates a
general principle that internal measures should not be applied so as to
afford protection to domestic production. This general principle informs
the rest of Article III. The purpose of Article III:1 is to establish
this general principle as a guide to understanding and interpreting the
specific obligations contained in Article III:2 and in the other
paragraphs of Article III, while respecting, and not diminishing in any
way, the meaning of the words actually used in the texts of those other
paragraphs. In short, Article III:1 constitutes part of the context of
Article III:2, in the same way that it constitutes part of the context
of each of the other paragraphs in Article III. Any other reading of
Article III would have the effect of rendering the words of Article
III:1 meaningless, thereby violating the fundamental principle of
effectiveness in treaty interpretation. Consistent with this principle
of effectiveness, and with the textual differences in the two sentences,
we believe that Article III:1 informs the first sentence and the second
sentence of Article III:2 in different ways.”(230)
142. In
EC — Asbestos, the Appellate Body, in interpreting Article
III:4 by comparing its terms with the terms used in Article III:2,
referred to Article III:1. See paragraph 234
below.
143. The precise significance of
Article III:1 for the interpretation
of Article III:2, first sentence, was also addressed by the Panels on
Argentina — Hides and Leather. See paragraph 154
below.(231)
(i) Reference to GATT practice
144. With respect to GATT practice on this subject-matter, see also
GATT Analytical Index, pages 139-140.
3. Article III:2
(a) General
(i) General distinction between first and second sentences
145. In Japan — Alcoholic Beverages II, the Appellate Body
described the distinction between the first and second sentences of
Article III:2 as follows:
“[T]he second sentence of Article III:2 provides for a separate and
distinctive consideration of the protective aspect of a measure in
examining its application to a broader category of products that are not
‘like products’ as contemplated by the first sentence …”.(232)
146. In
Canada — Periodicals, the Appellate Body, in reviewing the
Panel’s finding that the Canadian excise tax on magazines was
inconsistent with Article III:2, first sentence, also addressed the
distinction between the first and second sentence of Article
III:2:
“[T]here are two questions which need to be answered to determine
whether there is a violation of Article III:2 of
the GATT 1994: (a)
whether imported and domestic products are like products; and (b)
whether the imported products are taxed in excess of the domestic
products. If the answers to both questions are affirmative, there is a
violation of Article III:2, first sentence. If the answer to one
question is negative, there is a need to examine further whether the
measure is consistent with Article III:2, second sentence.”(233)
147. In
Canada — Periodicals, the Appellate Body also reiterated
its statement from Japan — Alcoholic Beverages II that Article
III:2,
second sentence, contemplates a “broader category of products” than
Article III:2, first sentence:
“Any measure that indirectly affects the conditions of competition
between imported and like domestic products would come within the
provisions of Article III:2, first sentence, or by implication, second
sentence, given the broader application of the latter.”(234)
148. Further, in
Canada — Periodicals, the Appellate Body rejected
Canada’s argument that the imported and domestic periodicals in
question were only imperfectly substitutable with each other and,
therefore, did not fall under the term “directly competitive or
substitutable product”:
“A case of perfect substitutability would fall within
Article III:2, first sentence, while we are examining the broader prohibition of
the second sentence.”(235)
149. In
Korea — Alcoholic Beverages, the Appellate Body examined
the Panel’s finding that Korean tax laws concerning liquor products
were inconsistent with Article III:2. In rejecting Korea’s appeal that
“potential competition” was not enough to find that subject products
were “directly competitive or substitutable products”, the Appellate
Body stated as follows:
“The first sentence of Article III:2 also forms part of the context
of the term. ‘Like’ products are a subset of directly competitive or
substitutable products: all like products are, by definition, directly
competitive or substitutable products, whereas not all ‘directly
competitive or substitutable’ products are ‘like’.(236) The notion
of like products must be construed narrowly(237) but the category of
directly competitive or substitutable products is broader.(238) While
perfectly substitutable products fall within Article
III:2, first
sentence, imperfectly substitutable products can be assessed under
Article III:2, second sentence.(239)”(240)
(ii) Relationship with paragraph 1
150. With respect to the relationship with
paragraph 1, see
paragraphs 140-143 above.
(iii) Legal status of Ad Article III
151. In Japan — Alcoholic Beverages II, the Appellate Body defined
the legal status of Interpretative Note Ad Article III:2 and its
relevance for the interpretation of Article III:2, as follows:
“Article III:2, second sentence, and the accompanying
Ad Article
have equivalent legal status in that both are treaty language which was
negotiated and agreed at the same time. The Ad Article does not replace
or modify the language contained in Article III:2, second sentence, but,
in fact, clarifies its meaning. Accordingly, the language of the second
sentence and the Ad Article must be read together in order to give them
their proper meaning.”(241)
(b) Paragraph 2, first sentence
(i) General
Test under Article III:2, first sentence
152. In Japan — Alcoholic Beverages II, the Appellate Body
clarified the two elements contained in the first sentence of Article
III:2 — “like products” and “in excess of”. The Appellate Body
established that these requirements constitute, in and of themselves, an
application of the general principle contained in Article III:1 and
that, consequently, the presence of a protective application need not be
established separately from the specific criteria of Article
III:2,
first sentence:
“Article III:1 informs
Article III:2, first sentence, by
establishing that if imported products are taxed in excess of like
domestic products, then that tax measure is inconsistent with Article
III. 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. The
ordinary meaning of the words of Article III:2, first sentence leads
inevitably to this conclusion. 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.
This approach to an examination of Article
III:2, first sentence, is
consistent with past practice under the GATT 1947. Moreover, it is
consistent with the object and purpose of Article
III:2, which the panel
in the predecessor to this case dealing with an earlier version of the
Liquor Tax Law, Japan — Customs Duties, Taxes and Labelling Practices
on Imported Wines and Alcoholic Beverages …, rightly stated as ‘promoting
non-discriminatory competition among imported and like domestic products
[which] could not be achieved if Article III:2 were construed in a
manner allowing discriminatory and protective internal taxation of
imported products in excess of like domestic products’.”(242)
153. In
Canada — Periodicals, the Appellate Body reiterated this
two-tiered test:
“[T]here are two questions which need to be answered to determine
whether there is a violation of Article III:2 of the GATT
1994: (a)
whether imported and domestic products are like products; and (b)
whether the imported products are taxed in excess of the domestic
products. If the answers to both questions are affirmative, there is a
violation of Article III:2, first sentence.”(243)
154. In Argentina — Hides and
Leather, Argentina, citing the
finding of the Appellate Body in Japan — Alcoholic Beverages II
referenced in paragraph 131 above, argued that the existence of a
protective application must be determined together with the other
specific requirements contained in Article III:2. The Panel rejected
this argument:
“We are unable to agree with Argentina’s interpretation of the
Appellate Body’s statement. As we understand it, the presence of a
protective application need be established neither separately nor
together with the specific requirements contained in Article
III:2,
first sentence. The quoted passage from the Appellate Body report in
Japan — Alcoholic Beverages II makes clear that Article
III:2, first
sentence, is, in effect, an application of the general principle stated
in Article III:1. Accordingly, whenever imported products from one
Member’s territory are subject to taxes in excess of those applied to
like domestic products in the territory of another Member, this is
deemed to ‘afford protection to domestic production’ within the
meaning of Article III:1. It follows that, in applying
Article III:2,
first sentence, recourse to the general principle of Article III:1 is
neither necessary nor appropriate.(244) The only requirements that need to
be demonstrated by the complaining party are those contained in Article
III:2, first sentence, itself.(245)”(246)
Burden of proof
155. In Japan — Alcoholic Beverages II, in a finding subsequently
not addressed by the Appellate Body, the Panel stated that “complainants
have the burden of proof to show first that products are like and
second, that foreign products are taxed in excess of domestic ones.”(247)
156. With respect to the issue of the burden of proof in general, see
Section XXXVI.D of the Chapter on the DSU.
(ii) “like domestic products”
Relationship between “like products” and “directly competitive
products” under Article III:2
157. In Japan — Alcoholic Beverages II, the Appellate Body analysed
the scope of the first sentence of Article III:2 in relation to the
second sentence of this Article. It held that the term “like products”
in Article III:2, first sentence, should be construed narrowly.
Subsequently, it considered the basic GATT approach for interpreting “like
products” generally in the various provisions of the GATT 1947:
“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. Consequently, we agree with the Panel also
that the definition of ‘like products’ in Article
III:2, first
sentence, should be construed narrowly.
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. The Report of the Working Party on Border Tax
Adjustments, adopted by the CONTRACTING PARTIES in 1970, set out the
basic approach for interpreting ‘like or similar products’ generally
in the various provisions of the GATT 1947:
‘… the interpretation of the term should be examined on a
case-by-case basis. This would allow a fair assessment in each case of
the different elements that constitute a “similar” product. Some
criteria were suggested for determining, on a case-by-case basis,
whether a product is “similar”: the product’s end-uses in a given
market; consumers’ tastes and habits, which change from country to
country; the product’s properties, nature and quality’.(248)
This approach was followed in almost all adopted panel reports after
Border Tax Adjustments.(249) This approach should be helpful in
identifying on a case-by-case basis the range of ‘like products’
that fall within the narrow limits of Article
III:2, first sentence in
the GATT 1994. Yet this approach will be most helpful if decision makers
keep ever in mind how narrow the range of ‘like products’ in Article
III:2, first sentence is meant to be as opposed to the range of ‘like’
products contemplated in some other provisions of the GATT 1994 and
other Multilateral Trade Agreements of the WTO Agreement. 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 judgement.
We do not agree with the Panel’s observation in paragraph 6.22 of the
Panel Report that distinguishing between ‘like products’ and ‘directly
competitive or substitutable products’ under Article III:2 is ‘an
arbitrary decision’. Rather, we think it is a discretionary decision
that must be made in considering the various characteristics of products
in individual cases.”(250)
158. The consequence of the determination whether two products are or
are not like was stated by the Appellate Body in Japan — Alcoholic
Beverages II:
“If imported and domestic products are not ‘like products’ for
the narrow purposes of Article III:2, first sentence, then they are not
subject to the strictures of that sentence and there is no inconsistency
with the requirements of that sentence. However, depending on their
nature, and depending on the competitive conditions in the relevant
market, those same products may well be among the broader category of
‘directly competitive or substitutable products’ that fall within
the domain of Article III:2, second sentence.”(251)
159. With respect to the nature of like products as a subset of the
category of “directly competitive or substitutable products”, see
also paragraph 149 above.
Relationship with “like products” in Article III:4
160. In
EC — Asbestos, the Appellate Body discussed the
relationship between the term “like products” in Article
III:4, and
that in the first sentence of Article III:2. See
paragraphs 237 and 239 below.
161. In Japan — Alcoholic Beverages II, the Panel discussed whether
the term “like products” can be interpreted differently between GATT
provisions, with a focus on the relationship between Article
III:2,
first sentence and Article III:4:
“The Panel noted that the term ‘like product’ appears in
various GATT provisions. The Panel further noted that it did not
necessarily follow that the term had to be interpreted in a uniform way.
In this respect, the Panel noted the discrepancy between Article
III:2,
on the one hand, and Article III:4 on the other: while the former
referred to Article III:1 and to like, as well as to directly
competitive or substitutable products (see also Article XIX of
GATT),
the latter referred only to like products. If the coverage of Article
III:2 is identical to that of Article III:4, a different interpretation
of the term ‘like product’ would be called for in the two
paragraphs. Otherwise, if the term ‘like product’ were to be
interpreted in an identical way in both instances, the scope of the two
paragraphs would be different. This is precisely why, in the Panel’s
view, its conclusions reached in this dispute are relevant only for the
interpretation of the term ‘like product’ as it appears in Article III:2.”(252)
Relationship with “like products” in other GATT provisions
162. In Japan — Alcoholic Beverages II, the Appellate Body
explained the possible differences in the scope of “like products”
depending on provisions. To illustrate that the term “like products”
will vary between different provisions of the WTO Agreement, the
Appellate Body evoked the image of an accordion:
“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. We believe that, in
Article III:2, first sentence of the GATT 1994, the accordion of ‘likeness’
is meant to be narrowly squeezed.”(253)
Hypothetical “like products”
163. In
Canada — Periodicals, the Panel found that the Canadian
excise tax on magazines was inconsistent with Article
III:2. Upon
appeal, Canada argued that the Panel erred in basing its comparison upon
a hypothetical example of periodicals. The Appellate Body endorsed the
Panel’s recourse to a hypothetical example of imported products:
“As Article III:2, first sentence, normally requires a comparison
between imported products and like domestic products, and as there were
no imports of split-run editions of periodicals because of the import
prohibition in Tariff Code 9958, which the Panel found (and Canada did
not contest on appeal) to be inconsistent with the provisions of Article
XI of the GATT 1994, hypothetical imports of split-run periodicals have
to be considered. 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.(254)”(255)
164. In
Indonesia — Autos, the Panel examined the consistency with
Article III of measures contained in the Indonesian National Car
Programme, including the luxury tax exemption given to certain
domestically produced cars. On the issue of hypothetical “like
products”, the Panel referred to the finding of the Appellate Body in
Canada — Periodicals, referenced in paragraph 163
above, and
emphasized the significance of the fact that the Indonesian car
programme distinguished between the products at issue on the grounds of
nationality of the producer or the origin of the parts and components of
the product:
“In Periodicals, the Appellate Body recognized the possibility of
using hypothetical imports to determine whether a measure violates
Article III:2, although in that case the Appellate Body rejected the
hypothetical example used by the Panel.(256) But this case is different.
Under the Indonesian car programmes the distinction between the products
for tax purposes is based on such factors as the nationality of the
producer or the origin of the parts and components contained in the
product. Appropriate hypotheticals are therefore easily constructed. An
imported motor vehicle alike in all aspects relevant to a likeness
determination would be taxed at higher rate simply because of its origin
or lack of sufficient local content. Such vehicles certainly can exist
(and, as demonstrated above, do in fact exist). In our view, such an
origin-based distinction in respect of internal taxes suffices in itself
to violate Article III:2, without the need to demonstrate the existence
of actually traded like products. This is directly in accord with the
broad purposes of Article III:2, as outlined by the Appellate Body
…”.(257)
165. In
Argentina — Hides and Leather, referring to the finding of
the Panel on Indonesia — Autos referenced in paragraph 164
above. The
Panel reiterated this standard of varying “quantum and nature of the
evidence” required for a finding under Article
III:2, first sentence,
depending on the “structure and design” of the measure at issue:
“In the case before us, the European Communities has neither
compared specific products nor addressed the criteria relevant to
determining likeness. The European Communities considers that it is not
incumbent upon it to do so. We agree. In circumstances such as those
confronting us in this case no comparison of specific products is
required. Logically, no examination of the various criteria relevant to
determining likeness is then called for either.
We consider that in the specific context of a claim under
Article III:2, first sentence, the quantum and nature of the evidence required
for a complaining party to discharge its burden of establishing a
violation is dependent, above all, on the structure and design of the
measure in issue.(258) The structure and design of RG 3431 and RG 3543 and
their domestic counterparts RG 3337 and RG 2784 are such that the level
of tax pre-payment is not determined by the physical characteristics or
end-uses of the products subject to these resolutions, but instead is
determined by factors which are not relevant to the definition of
likeness, such as whether a particular product is definitively imported
into Argentina or sold domestically as well as the characteristics of
the seller or purchaser of the product.(259) It is therefore inevitable,
in our view, that like products will be subject to RG 3431 and its
domestic counterpart, RG 3337. The same holds true for RG 3543 and its
domestic counterpart, RG 2784.(260) The European Communities has
demonstrated this to our satisfaction, and, in our view, this is all it
needs to establish in the present case as far as the ‘like product’
requirement contained in Article III:2, first sentence, is concerned.
This view is consistent with that adopted by the panel in
Indonesia
— Autos. That panel was of the view that:
‘… an origin-based distinction in respect of internal taxes
suffices in itself to violate Article III:2, without the need to
demonstrate the existence of actually traded like products.’(261)”(262)
Relevant factors for the determination of “likeness”
General
166. In Japan — Alcoholic Beverages II, the Appellate Body was
called upon to examine the Panel’s finding of inconsistency of the
Japanese Liquor Tax Law with Article III:2. The Appellate Body analysed
what factors to take into consideration in deciding whether two products
in question were “like products”:
“We agree with the practice under the GATT 1947 of determining
whether imported and domestic products are ‘like’ on a case-by-case
basis. The Report of the Working Party on Border Tax Adjustments,
adopted by the CONTRACTING PARTIES in 1970, set out the basic approach
for interpreting ‘like or similar products’ generally in the various
provisions of the GATT 1947:
… the interpretation of the term should be examined on a
case-by-case basis. This would allow a fair assessment in each case of
the different elements that constitute a ‘similar’ product. Some
criteria were suggested for determining, on a case-by-case basis,
whether a product is ‘similar’: the product’s end-uses in a given
market; consumers’ tastes and habits, which change from country to
country; the product’s properties, nature and quality.(263)
This approach was followed in almost all adopted panel reports after
Border Tax Adjustments. This approach should be helpful in identifying
on a case-by-case basis the range of ‘like products’ that fall
within the narrow limits of Article III:2, first sentence in the GATT
1994.”(264)
167. In
Canada — Periodicals, the Appellate Body reiterated the
aforementioned finding in Japan — Alcoholic Beverages II:
“[T]he 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.”(265)
168. With respect to the criteria of likeness, see also the Panel
Report on Argentina — Hides and Leather, where the Panel referred to
the Appellate Body’s finding in Canada — Periodicals referenced in
paragraph 167 above.(266)
Relevance of tariff classifications and bindings
169. In Japan — Alcoholic Beverages II, the Appellate Body
addressed the relevance of tariff classification for establishing the
“likeness” of products:
“A uniform tariff classification of products can be relevant in
determining what are ‘like products’. If sufficiently detailed,
tariff classification can be a helpful sign of product similarity.
Tariff classification has been used as a criterion for determining ‘like
products’ in several previous adopted panel reports.(267) For example,
in the 1987 Japan — Alcohol Panel Report, the panel examined certain
wines and alcoholic beverages on a ‘product-by-product basis’ by
applying the criteria listed in the Working Party Report on Border Tax
Adjustments,
… as well as others recognized in previous GATT practice (see BISD
25S/49, 63), such as the Customs Cooperation Council Nomenclature (CCCN)
for the classification of goods in customs tariffs which has been
accepted by Japan.(268)”(269)
170. In Japan — Alcoholic Beverages II, in addition to tariff
classification, the Appellate Body also examined the relevance of tariff
bindings for the determination of “like products”. In contrast to
tariff classification, the Appellate Body expressed reservations about
the reliability of tariff bindings as a criterion in establishing “likeness”:
“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 II of the GATT 1994. There are risks in using tariff
bindings that are too broad as a measure of product ‘likeness’. Many
of the least-developed country Members of the WTO submitted schedules of
concessions and commitments as annexes to the GATT 1994 for the first
time as required by Article XI of the WTO Agreement. Many of these
least-developed countries, as well as other developing countries, have
bindings in their schedules which include broad ranges of products that
cut across several different HS tariff headings. For example, many of
these countries have very broad uniform bindings on nonagricultural
products. This does not necessarily indicate similarity of the products
covered by a binding. Rather, it represents the results of trade
concessions negotiated among Members of the WTO.
It is true that there are numerous tariff bindings which are in fact
extremely precise with regard to product description and which,
therefore, can provide significant guidance as to the identification of
‘like products’. Clearly enough, these determinations need to be
made on a case-by-case basis. However, tariff bindings that include a
wide range of products are not a reliable criterion for determining or
confirming product ‘likeness’ under Article
III:2.”(270)
171. With respect to the purpose of
Article III as it relates to
tariff bindings, see paragraph 120 above.
Reference to GATT practice
172. With respect to the interpretation of the “like products”
under Article III:2, see also GATT Analytical Index, pages 155-159.
(iii) “internal tax or other internal charge of any kind”
173. In
Argentina — Hides and Leather, the Panel examined whether
the measures at issue, establishing a mechanism for the collection of
certain taxes, were covered by Article III:2. The Panel found that the
measures provide for the imposition of charges and create a liability
and, as such, fall under the scope of Article
III:2:
“We consider that RG 3431 and RG 3543 are properly viewed not as
taxes in their own right, but as mechanisms for the collection of the
IVA [value-added tax] and IG [income tax]. What is special, however,
about RG 3431 and RG 3543 as mechanisms for the collection of the IVA
and IG is that they provide for the imposition of charges. We recall
that Article III:2 covers ‘charges of any kind’ (emphasis added).
The term ‘charge’ denotes, inter alia, a ‘pecuniary burden’ and
a ‘liability to pay money laid on a person …’. There can be no
doubt, in our view, that both RG 3431 and RG 3543 impose a pecuniary
burden and create a liability to pay money. Moreover, the charges
provided for in RG 3431 and RG 3543 represent advance payments of the
IVA and IG. RG 3431 and RG 3543 in effect impose on importers part of
their definitive IVA and IG liability. It is clear to us, therefore,
that the charges in question qualify as tax measures. As such, they fall
to be assessed under Article III:2.
With regard to Argentina’s argument that RG 3431 and RG 3543 are
measures designed to achieve efficient tax administration and collection
and as such do not fall under Article III:2, it should be noted that
Argentina has provided no support for this argument, except to say that
it is up to Members to decide how best to achieve efficient tax
administration. We agree that Members are free, within the outer bounds
defined by such provisions as Article III:2, to administer and collect
internal taxes as they see fit. However, if, as here, such ‘tax
administration’ measures take the form of an internal charge and are
applied to products, those measures must, in our view, be in conformity
with Article III:2. There is nothing in the provisions of
Article III:2
to suggest a different conclusion. If it were accepted that ‘tax
administration’ measures are categorically excluded from the ambit of
Article III:2, this would create a potential for abuse and circumvention
of the obligations contained in Article III:2. It must be stated,
moreover, that the applicability of Article III:2 is not conditional
upon the policy purpose of a tax measure.(271) On that basis, we cannot
agree with Argentina that charges intended to promote efficient tax
administration or collection a priori fall outside the scope of Article
III:2.”(272)
Reference to GATT practice
174. With respect to practice on this subject-matter under GATT, see
GATT Analytical Index, pages 141-150.
(iv) “in excess of those applied”
General
175. In Japan — Alcoholic Beverages II, the Appellate Body
established a strict standard for the term “in excess of” under
Article III:2, first sentence:
“The only remaining issue under Article
III:2, first sentence, is
whether the taxes on imported products are ‘in excess of’ those on
like domestic products. If so, then the Member that has imposed the tax
is not in compliance with Article III. 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.’“(273)
Methodology of comparison — “individual import transactions”
basis
176. In
Argentina — Hides and Leather, the Panel explained the
method of comparison, for the purposes of Article
III:1, first sentence,
of the tax burdens imposed on imports and on domestic like products. In
the case before it, the Panel emphasized that Article
III:2, first
sentence, requires a comparison of actual tax burdens rather than merely
of nominal tax burdens:
“[I]t is necessary to recall the purpose of Article
III:2, first
sentence, which is to ensure ‘equality of competitive conditions
between imported and like domestic products’(274). Accordingly,
Article III:2, first sentence, is not concerned with taxes or charges as such or
the policy purposes Members pursue with them, but with their economic
impact on the competitive opportunities of imported and like domestic
products. It follows, in our view, that what must be compared are the
tax burdens imposed on the taxed products.
We consider that Article
III:2, first sentence, requires a comparison
of actual tax burdens rather than merely of nominal tax burdens. Were it
otherwise, Members could easily evade its disciplines. Thus, even where
imported and like domestic products are subject to identical tax rates,
the actual tax burden can still be heavier on imported products. This
could be the case, for instance, where different methods of computing
tax bases lead to a greater actual tax burden for imported products. In
this regard, the GATT 1947 panel in Japan — Alcoholic Beverages I has
stated that:
… in assessing whether there is tax discrimination, account is to
be taken not only of the rate of the applicable internal tax but also of
the taxation methods (e.g. different kinds of internal taxes,
direct taxation of the finished product or indirect taxation by taxing
the raw materials used in the product during the various stages of its
production) and of the rules for the tax collection (e.g. basis
of assessment).(275)
It may thus be stated, in more general terms, that a determination of
whether an infringement of Article III:2, first sentence, exists must be
made on the basis of an overall assessment of the actual tax burdens
imposed on imported products, on the one hand, and like domestic
products, on the other hand.”(276)
177. In
Argentina — Hides and Leather, the measure at issue was,
inter alia, an income tax provision under which customs authorities
collected a certain amount of tax when foreign goods were definitively
imported into Argentina. The normal applicable tax rate was 3 per cent.
The corresponding provision for internal sales provided for a
withholding rate of 2 or 4 per cent, depending on whether the payment,
on which the tax was being withheld, was made to a registered or
non-registered taxpayer. Argentina argued that the measure applicable to
imported goods was consistent with Article III:2, first sentence
because, “the 3 percent rate applicable to imports is lower than the 4
percent rate applicable to like domestic products”. The Panel
explained:
“Article III:2, first sentence, is applicable to each individual
import transaction. It does not permit Members to balance more
favourable tax treatment of imported products in some instances against
less favourable tax treatment of imported products in other instances.(277)”(278)
178. In
Canada — Periodicals, the Appellate Body also addressed the
issue of “balancing more favourable treatment in some instances
against less favourable treatment in other instances” under Article
III:2, second sentence. See paragraph 217 below.
179. With respect to the methodology of comparison used to examine
the requirement of “no less favourable treatment” under Article
III:4, see paragraphs 270-275
below.(279)
Relevance of duration of tax differentials
180. In
Argentina — Hides and Leather, the measure at issue
provided for the pre-payment of taxes on import sales, while exempting
certain types of internal sales from such pre-payment; thus, although a
tax liability would arise for every sale, certain internal sales were
not subject to the tax pre-payment requirement. The Panel held that the
loss of interest on the part of the taxpayer due to the pre-payment
requirement constituted a tax differential (even if the same nominal tax
rates were imposed). The Panel then rejected Argentina’s justification
that the tax burden differential was limited to a 30-day period and
therefore was de minimis:
“The terms of Article
III:2, first sentence, prohibit tax burden
differentials irrespective of whether they are of limited duration.
Moreover, since we have found above that even the smallest tax burden
differential is in violation of Article III:2, first sentence, it would
be inconsistent for us to allow tax burden differentials on the basis
that their impact is limited to a 30-day period.”(280)
Relevance of differences among sellers of goods
181. In
Argentina — Hides and Leather, the Panel addressed
Argentina’s tax collection mechanism which required the pre-payment of
taxes only with respect to internal sales made by certain taxable
persons, so-called agentes de percepción, whilst in respect of import
transactions, a pre-payment obligation would arise without regard to who
made them. See also paragraph 180 above. Finding this mechanism
inconsistent with Article III:2, first sentence, the Panel stated:
“As a further consideration, we add that, in the context of an
inquiry under Article III:2, first sentence, the mere fact that a
domestic product is sold by a non-agente de percepción does not, in our
view, render a product which is otherwise like an imported product ‘unlike’
that product.(281)
…
The identity and circumstances of the persons involved in sales
transactions cannot, in our view, serve as a justification for tax
burden differentials.(282)”(283)
Relevance of distinction based upon nationality of producers or parts
and components
182. In
Indonesia — Autos, the Panel found that tax differences are
necessarily inconsistent with Article III:2, first sentence, if they are
based only upon the nationality of producers or the origin of the parts
and components contained in the products:
“[B]ecause of the structure of the tax regime under examination,
any imported like products would necessarily be taxed in excess of
domestic like products. In considering the broader arguments put forward
by the complainants that the tax measures in dispute violate Article
III:2 because they discriminate not on the basis of factors affecting
the properties, nature, qualities or end use of the products, but on
origin-related criteria, we recall that the Appellate Body decisions in
Alcoholic Beverages (1996) and Periodicals suggest that the term ‘like
products’ as used in Article III:2 should be interpreted narrowly.(284)
We note, however, that in this case the ‘like products’ issue is not
the same as the ‘like products’ issue in the Alcoholic Beverages
(1996) case. There, the internal tax imposed on domestic shochu was the
same as that imposed on imported shochu; the higher tax imposed on
imported vodka was also imposed on domestic vodka. Identical products
(not considering brand differences) were taxed identically. The issue
was whether the differences between the two products shochu and vodka,
as defined for tax purposes, were so minor that shochu and vodka should
be considered to be like products and therefore subject to the
requirement of Article III:2, first sentence, that one should not be
taxed in excess of the other. Here, the situation is quite different.
The distinction between the products, which results in different levels
of taxation, is not based on the products per se, but rather on such
factors as the nationality of the producer or the origin of the parts
and components contained in the product. As such, an imported product
identical in all respects to a domestic product, except for its origin
or the origin of its parts and components or other factors not related
to the product itself, would be subject to a different level of
taxation.”(285)
Reference to GATT practice
183. With respect to the interpretation of “in excess of those
applied” under Article III:2, see also GATT Analytical Index, pages
150-155.
Relevance of regulatory objectives
184. In Japan — Alcoholic Beverages II, the Appellate Body made a
general statement on the relevance of regulatory objectives of a measure
at issue, finding that Members may pursue, through their tax measures,
any given policy objective, provided they do so in compliance with Article III:2. See paragraph 128 above.
185. In
Argentina — Hides and Leather, the Panel rejected Argentina’s
argument that the measures in question were designed to achieve
efficient tax administration and collection and as such did not fall
under Article III:2. The Panel stated:
“We agree that Members are free, within the outer bounds defined by
such provisions as Article III:2, to administer and collect internal
taxes as they see fit. However, if, as here, such ‘tax administration’
measures take the form of an internal charge and are applied to
products, those measures must, in our view, be in conformity with Article
III:2. There is nothing in the provisions of Article
III:2 to
suggest a different conclusion. If it were accepted that ‘tax
administration’ measures are categorically excluded from the ambit of Article
III:2, this would create a potential for abuse and circumvention
of the obligations contained in Article III:2.”(286)
186. With respect to the relevance of regulatory objectives in
relation to the “aims-and-effect” test, see paragraphs 128-132
above.
(v) Applied, “directly or indirectly”, to like domestic products
187. In
Canada — Periodicals, the Appellate Body reviewed the Panel’s
finding that the Canadian excise tax on magazines was inconsistent with Article
III:2. The Panel had found that the relevant tax provision was a
measure affecting the trade in goods, as it applied to so-called
split-run editions of periodicals which were distinguished from foreign
non-split-run editions by virtue of their advertising content directed
at the Canadian market. Canada argued that its measure regulated trade
in services (advertising) “in their own right”, therefore did not
“indirectly” affect imported products and, as a result, was subject
to GATS and not to GATT 1994. The Appellate Body rejected Canada’s
argument:
“An examination of Part V.1 of the Excise Tax Act demonstrates that
it is an excise tax which is applied on a good, a split-run edition of a
periodical, on a ‘per issue’ basis. By its very structure and
design, it is a tax on a periodical. It is the publisher, or in the
absence of a publisher resident in Canada, the distributor, the printer
or the wholesaler, who is liable to pay the tax, not the advertiser.
Based on the above analysis of the measure, which is essentially an
excise tax imposed on split-run editions of periodicals, we cannot agree
with Canada’s argument that this internal tax does not ‘indirectly’
affect imported products.”(287)
188. In
Argentina — Hides and Leather, Argentina argued that, since
an income tax is not a tax on products, its measure establishing the
collection regime for such a tax (“RG 3543”) could not be subject to
the provisions of Article III:2. Citing the finding of the Appellate
Body in Canada — Periodicals as support(288), the Panel rejected this
argument:
“We … agree that income taxes, because they are taxes not
normally directly levied on products, are generally considered not to be
subject to Article III:2.(289) It is not obvious to us, however, how the
fact that the IG is an income tax outside the scope of Article
III:2 logically leads to the conclusion that RG 3543 does not fall within the
ambit of Article III:2, even though RG 3543 is a tax measure applied to
products. Not only do we see nothing in the provisions of Article
III:2 which would preclude the applicability of these provisions to RG 3543
merely because of the latter’s linkage to the IG. Were we to accept
Argentina’s argument, it would also not be difficult for Members to
introduce measures designed to circumvent the disciplines of Article
III:2.”(290)
Reference to GATT practice
189. With respect to the practice on this subject-matter.
(c) Paragraph 2, second sentence
(i) General
Legal status of Ad Article III:2
190. In Japan — Alcoholic Beverages II, the Appellate Body
discussed the legal status of Note Ad Article III:2 in the
interpretation of Article III:2 and held that the Note must always be
read together with Article III. See paragraph 151
above.
Test under Article III:2, second sentence
191. In Japan — Alcoholic Beverages II, the Appellate Body
explained the test to be used under Article III:2, second sentence, and
distinguished this test from the test applicable under the first
sentence. This distinction, in the view of the Appellate Body, is a
result of the explicit reference to Article III:1 in the second sentence
of Article III:2:
“Unlike that of Article
III:2, first sentence, the language of Article III:2, second sentence, specifically invokes Article
III:1. The
significance of this distinction lies in the fact that whereas Article III:1 acts implicitly in addressing the two issues that must be
considered in applying the first sentence, it acts explicitly as an
entirely separate issue that must be addressed along with two other
issues that are raised in applying the second sentence. Giving full
meaning to the text and to its context, three separate issues must be
addressed to determine whether an internal tax measure is inconsistent
with Article III:2, second sentence. These three issues are whether:
(1) the imported products and the domestic products are
‘directly
competitive or substitutable products’ which are in competition with
each other;
(2) the directly competitive or substitutable imported and domestic
products are ‘not similarly taxed’; and
(3) the dissimilar taxation of the directly competitive
or substitutable imported domestic products is ‘applied … so as to
afford protection to domestic production’.
Again, these are three separate issues. Each must be established
separately by the complainant for a panel to find that a tax measure
imposed by a Member of the WTO is inconsistent with Article
III:2,
second sentence.”(291)
Burden of proof
192. In Japan — Alcoholic Beverages II, the Panel, in a finding not
expressly addressed by the Appellate Body, allocated the burden of proof
under Article III:2, second sentence, to the complaining party:
“[T]he complainants have the burden of proof to show first, that
the products concerned are directly competitive or substitutable and
second, that foreign products are taxed in such a way so as to afford
protection to domestic production”.(292)
193. In
Korea — Alcoholic Beverages, the Panel followed the
approach to the allocation of burden of proof according to the standard
set out by the Panel on Japan — Alcoholic Beverages II, referred to in
paragraph 192 above. The Appellate Body rejected Korea’s appeal
against this allocation of the burden of proof:
“[T]he Panel properly understood and applied the rules on
allocation of the burden of proof. First, the Panel insisted that it
could make findings under Article III:2, second sentence, only with
respect to products for which a prima facie case had been made out on
the basis of evidence presented. Second, it declined to establish a
presumption concerning all alcoholic beverages within HS 2208. Such a
presumption would be inconsistent with the rules on the burden of proof
because it would prematurely shift the burden of proof to the defending
party. The Panel, therefore, did not consider alleged violations of Article
III:2, second sentence, concerning products for which evidence
was not presented. Thus, the Panel examined tequila because evidence was
presented for it, but did not examine mescal and certain other alcoholic
beverages included in HS 2208 for which no evidence was presented.
Third, contrary to Korea’s assertions, the Panel did consider the
evidence presented by Korea in rebuttal, but concluded that there was
‘sufficient unrebutted evidence’ for it to make findings of
inconsistency.”(293) (emphasis added)
(ii)
“directly competitive or substitutable products”
Relevance of market competition/cross-price elasticity
General
194. In interpreting the term “directly competitive or
substitutable” products, the Appellate Body in Japan — Alcoholic
Beverages II found that it was “not inappropriate” to consider the
competitive conditions in the relevant market, as manifested in the
cross-price elasticity in particular:
“The GATT 1994 is a commercial agreement, and the WTO is concerned,
after all, with markets. 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. The Panel did not say
that cross-price elasticity of demand is ‘the decisive criterion’
for determining whether products are ‘directly competitive or
substitutable’.”(294)
195. The Appellate Body developed this finding — contained in
Japan
— Alcoholic Beverages II — in the Korea — Alcoholic Beverages
dispute:
“We observe that studies of cross-price elasticity, which in our
Report in Japan — Alcoholic Beverages were regarded as one means of
examining a market,(295) involve an assessment of latent demand. Such
studies attempt to predict the change in demand that would result from a
change in the price of a product following, inter alia, from a change in
the relative tax burdens on domestic and imported products.”(296)
196. In its approach to cross-price elasticity between domestic and
imported products, the Panel on Korea — Alcoholic Beverages emphasized
the “quality” or “nature” of competition, rather than the “quantitative
overlap of competition”. Upon appeal, Korea argued that through its
reliance on the “nature of competition” the Panel had created a “vague
and subjective element” not found in Article
III:2, second sentence.
The Appellate Body, however, shared the Panel’s scepticism towards
reliance upon the “quantitative overlap of competition”:
“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.(297) 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’.”(298)
Relevance of the market situation in other countries
197. In
Korea — Alcoholic Beverages, the Appellate Body addressed
whether the market situation in other Members should be taken into
consideration in evaluating whether subject products are directly
competitive or substitutable products. The Appellate Body held that
although not every other market would be relevant, evidence from other
markets may nevertheless be pertinent to the analysis of the market at
issue:
“It is, of course, true that the ‘directly competitive or
substitutable’ relationship must be present in the market at issue(299),
in this case, the Korean market. It is also true that consumer
responsiveness to products may vary from country to country.(300) 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.”(301)
“directly competitive or substitutable”
198. In
Korea — Alcoholic Beverages, the Appellate Body considered
the “object and purpose” of Article III in its interpretation of the
term “directly competitive or substitutable”:
“[T]he 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’.”(302)
Latent, extant and potential demand
199. In
Korea — Alcoholic Beverages, the Appellate Body considered
that competition in the market place is a dynamic, evolving process and
thus the concept of “directly competitive or substitutable” implies
that “the competitive relationship between products is not to be
analyzed exclusively by reference to current consumer preferences”.
Following this line of argumentation, the Appellate Body concluded that
the term “directly competitive or substitutable” may include the
analysis of latent as well as extant demand:
“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 market place 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(303) 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.”(304) The words ‘competitive or substitutable’ are qualified
in the Ad Article by the term ‘directly’. In the context of Article
III:2, second sentence, the word ‘directly’ suggests a degree of
proximity in the competitive relationship between the domestic and the
imported products. The word ‘directly’ does not, however, prevent a
panel from considering both latent and extant demand.”(305)
200. In support of its proposition that the term “directly
competitive or substitutable” required a dynamic interpretation of
both latent and extant demand, the Appellate Body in Korea — Alcoholic
Beverages rejected an attempt by one of the parties to read a
prohibition of considering “potential competition” into the text of
Note Ad Article
III:
“Our reading of the ordinary meaning of the term ‘directly
competitive or substitutable’ is supported by its context as well as
its object and purpose. As part of the context, we note that the Ad
Article provides that the second sentence of Article III:2 is applicable
‘only in cases where competition was involved’. (emphasis added)
According to Korea, the use of the past indicative ‘was’ prevents a
panel taking account of ‘potential’ competition. However, in our
view, the use of the word ‘was’ does not have any necessary
significance in defining the temporal scope of the analysis to be
carried out. The Ad Article describes the circumstances in which a
hypothetical tax ‘would be considered to be inconsistent with the
provisions of the second sentence’. (emphasis added) The first part of
the clause is cast in the conditional mood (‘would’) and the use of
the past indicative simply follows from the use of the word ‘would’.
It does not place any limitations on the temporal dimension of the word
‘competition’.”(306)
201. The Appellate Body subsequently referred to the context of
Article III:2 to support its dynamic approach to the notion of “directly
competitive or substitutable”:
“The context of Article III:2, second sentence, also includes
Article III:1 of the GATT 1994. As we stated in our Report in Japan —
Alcoholic Beverages, Article III:1 informs
Article III:2 through
specific reference.(307)
Article III:1 sets forth the principle ‘that
internal taxes … should not be applied to imported or domestic
products so as to afford protection to domestic production.’ It is in
the light of this principle, which embodies the object and purpose of
the whole of Article III, that the term ‘directly competitive and
substitutable’ must be read. As we said in Japan — Alcoholic
Beverages:
‘The broad and fundamental purpose of Article III is to
avoid
protectionism in the application of internal tax and regulatory
measures. … Toward this end, Article III obliges Members of the WTO to
provide equality of competitive conditions for imported products in
relation to domestic products. … Moreover, 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 nonexistent; Article III protects expectations not
of any particular trade volume but rather of the equal competitive
relationship between imported and domestic products.’ (emphasis
added).”(308)
202. The Panel on Japan — Alcoholic Beverages II held that “a tax
system that discriminates against imports has the consequence of
creating and even freezing preferences for domestic goods. In the Panel’s
view, this meant that consumer surveys in a country with such a tax
system would likely understate the degree of potential competitiveness
between substitutable products.”(309) The Appellate Body on
Korea —
Alcoholic Beverages confirmed this approach and emphasized the
importance of an analysis of “latent” or “potential” demand by
pointing out that current consumer behaviour itself could be influenced
by protectionist taxation. It concluded that if only “current
instances of substitution” could be taken into account, Article III:2
would, in effect, be confirming the very protective taxation it aims to
prohibit:
“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. Past panels have, in fact, acknowledged that
consumer behaviour might be influenced, in particular, by protectionist
internal taxation. Citing the panel in Japan — Customs Duties, Taxes
and Labelling Practices on Imported Wines and Alcoholic Beverages …(310),
the panel in Japan — Alcoholic Beverages observed that ‘a tax system
that discriminates against imports has the consequence of creating and
even freezing preferences for domestic goods’.(311) The panel in
Japan
— Alcoholic Beverages also stated that ‘consumer surveys in a
country with … a [protective] tax system would likely understate the
degree of potential competitiveness between substitutable products’.(312)
(emphasis added) Accordingly, in some cases, it may be highly relevant
to examine latent demand.”(313)
203. The Appellate Body on
Korea — Alcoholic Beverages concluded
its analysis of why “latent” demand had to be considered in the
interpretation of “directly competitive or substitutable products”
by emphasizing the need for such an analysis particularly in the product
sector in the case before it:
“We note, however, that actual consumer demand may be influenced by
measures other than internal taxation. Thus, demand may be influenced
by, inter alia, earlier protectionist taxation, previous import
prohibitions or quantitative restrictions. Latent demand can be a
particular problem in the case of ‘experience goods’, such as food
and beverages, which consumers tend to purchase because they are
familiar with them and with which consumers experiment only reluctantly.
[T]he 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.”(314)
204. In
Canada — Periodicals, the Appellate Body reiterated the
need for the consideration of latent demand in assessing whether
products are “directly competitive or substitutable”. In this
dispute, the Appellate Body rejected Canada’s argument that the market
shares of foreign and domestic magazines on the Canadian periodicals
market had remained constant over an extended period of time and that
this fact pointed to a lack of competition or substitutability between
domestic and foreign periodicals:
“We are not impressed either by Canada’s argument that the market
share of imported and domestic magazines has remained remarkably
constant over the last 30-plus years, and that one would have expected
some variation if competitive forces had been in play to the degree
necessary to meet the standard of ‘directly competitive’ goods. This
argument would have weight only if Canada had not protected the domestic
market of Canadian periodicals through, among other measures, the import
prohibition of Tariff Code 9958 and the excise tax of Part V.1 of the
Excise Tax Act.”(315)
205. In Korea — Alcoholic
Beverages, the Panel elaborated on the
meaning of the term “directly competitive or substitutable products”:
“[W]e must first decide how the term ‘directly competitive or
substitutable’ should be interpreted. …
The Appellate Body on Japan — Taxes on Alcoholic Beverages II
stated that ‘like product’ should be narrowly construed for purposes
of Article III:2. It then noted that directly competitive or
substitutable is a broader category, saying: ‘how much broader that
category of “directly competitive or substitutable products” may be
in a given case is a matter for the panel to determine based on all the
relevant facts in that case.’(316) Article 32 of the Vienna Convention
provides that it is appropriate to refer to the negotiating history of a
treaty provision in order to confirm the meaning of the terms as
interpreted pursuant to the application of Article 31. A review of the
negotiating history of Article III:2, second sentence and the Ad Article
III language confirms that the product categories should not be so
narrowly construed as to defeat the purpose of the anti-discrimination
language informing the interpretation of Article
III. The Geneva session
of the Preparatory Committee provided an explanation of the language of
the second sentence by noting that apples and oranges could be directly
competitive or substitutable. Other examples provided were domestic
linseed oil and imported tung oil and domestic synthetic rubber and
imported natural rubber. There was discussion of whether such products
as tramways and busses or coal and fuel oil could be considered as
categories of directly competitive or substitutable products. There was
some disagreement with respect to these products.
This negotiating history illustrates the key question in this regard.
It is whether the products are directly competitive or substitutable.
Tramways and busses, when they are not directly competitive, may still
be indirectly competitive as transportation systems. Similarly even if
most power generation systems are set up to utilize either coal or fuel
oil, but not both, these two products could still compete indirectly as
fuels. Thus, the focus should not be exclusively on the quantitative
extent of the competitive overlap, but on the methodological basis on
which a panel should assess the competitive relationship.
At some level all products or services are at least indirectly
competitive. Because consumers have limited amounts of disposable
income, they may have to arbitrate between various needs such as giving
up going on a vacation to buy a car or abstaining from eating in
restaurants to buy new shoes or a television set. However, an assessment
of whether there is a direct competitive relationship between two
products or groups of products requires evidence that consumers consider
or could consider the two products or groups of products as alternative
ways of satisfying a particular need or taste.”(317)
Factors relevant to “directly competitive or substitutable”
206. In Japan — Alcoholic Beverages II, the Appellate Body agreed
with the Panel’s illustrative enumeration of the factors to be
considered in deciding whether two subject products are “directly
competitive or substitutable”; for example, the nature of the compared
products, and the competitive conditions in the relevant market, in
addition to their physical characteristics, common end-use, and tariff
classifications.(318)
207. In
Korea — Alcoholic Beverages, the Panel evaluated whether
the subject products were “directly competitive or substitutable
products” by discussing the various characteristics of the products.
The Appellate Body implicitly endorsed this approach in the context of
upholding the Panel’s approach of grouping certain products into
categories:(319)
“We next will consider the various characteristics of the products
to assess whether there is a competitive or substitutable relationship
between the imported and domestic products and draw conclusions as to
whether the nature of any such relationship is direct. We will review
the physical characteristics, end-uses including evidence of advertising
activities, channels of distribution, price relationships including
cross-price elasticities, and any other characteristics.”(320)
208. With respect to the “grouping” methodology, see also
paragraph 209 below:
Methodology of comparison — grouping of products
209. In
Korea — Alcoholic Beverages, the Appellate Body agreed with
the Panel’s comparison method of domestic and imported products, where
under both types of soju (Korean traditional liquor), i.e. distilled and
diluted soju, were compared with imported liquor products on a group
basis, rather than on an item-by-item basis. The Appellate Body rejected
Korea’s appeal of this methodology :
“We consider that Korea’s argument raises two distinct questions.
The first question is whether the Panel erred in its ‘analytical
approach’. The second is whether, on the facts of this case, the Panel
was entitled to group the products in the manner that it did. Since the
second question involves a review of the way in which the Panel assessed
the evidence, we address it in our analysis of procedural issues.
The Panel describes ‘grouping’ as an ‘analytical tool’. It
appears to us, however, that whatever else the Panel may have seen in
this ‘analytical tool’, it used this ‘tool’ as a practical
device to minimize repetition when examining the competitive
relationship between a large number of differing products. 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. We share Korea’s
concern that, in certain circumstances, such ‘grouping’ of products
might result in individual product characteristics being ignored, and
that, in turn, might affect the outcome of a case. However, as we will
see below, the Panel avoided that pitfall in this case.
Whether, and to what extent, products can be grouped is a matter to
be decided on a case-by-case basis. In this case, the Panel decided to
group the imported products at issue on the basis that:
… on balance, all of the imported products specifically identified
by the complainants have sufficient common characteristics, end-uses and
channels of distribution and prices… .(321)
As the Panel explained in the footnote attached to this passage, the
Panel’s subsequent analysis of the physical characteristics, end-uses,
channels of distribution and prices of the imported products confirmed
the correctness of its decision to group the products for analytical
purposes. Furthermore, where appropriate, the Panel did take account of
individual product characteristics. It, therefore, seems to us that the
Panel’s grouping of imported products, complemented where appropriate
by individual product examination, produced the same outcome that
individual examination of each imported product would have produced.(322)
We, therefore, conclude that the Panel did not err in considering the
imported beverages together.”(323)
210. In
Argentina — Hides and Leather, the Panel discussed the
methodology of comparison to be applied with respect to the term “in
excess of those applied” under the first sentence of Article
III:2.
See paragraphs 176-177 above. See also the Appellate Body’s finding
in Canada — Periodicals on the methodology of comparison for “dissimilar
taxation”. See paragraph 217 below. Also, with respect to the
methodology of comparison applicable to the term “no less favourable
treatment” under Article III:4, see paragraphs 270-275
below.
Like products as a subset of directly competitive or substitutable
products
211. In
Korea — Alcoholic Beverages, the Appellate Body defined “like
products” as a subset of “directly competitive or substitutable”
products:
“The first sentence of Article III:2 also forms part of the context
of the term. ‘Like’ products are a subset of directly competitive or
substitutable products: all like products are, by definition, directly
competitive or substitutable products, whereas not all ‘directly
competitive or substitutable’ products are ‘like’.(324) The notion
of like products must be construed narrowly(325) but the category of
directly competitive or substitutable products is broader.(326) While
perfectly substitutable products fall within Article
III:2, first
sentence, imperfectly substitutable products can be assessed under
Article III:2, second sentence.(327)”(328)
Reference to GATT practice
212. With respect to the interpretation of “directly competitive or
substitutable products” under GATT, see also GATT Analytical Index,
pages 159-161.
Relationship with “like products”
213. In Japan — Alcoholic Beverages II and
Korea — Alcoholic Beverages, the Appellate Body compared the term “like products” with
the term “directly competitive or substitutable products”. See
paragraphs 157-159 above.
(iii) “not similarly taxed”
General
“de minimis” standard
214. In Japan — Alcoholic Beverages II, the Appellate Body
interpreted the term “not similarly taxed” as requiring excessive
taxation more than “de minimis”:
“To give due meaning to the distinctions in the wording of
Article III:2, first sentence, and Article
III:2, second sentence, the phrase
‘not similarly taxed’ in the Ad Article to the second sentence must
not be construed so as to mean the same thing as the phrase ‘in excess
of’ in the first sentence. On its face, the phrase ‘in excess of’
in the first sentence means any amount of tax on imported products ‘in
excess of’ the tax on domestic ‘like products’. The phrase ‘not
similarly taxed’ in the Ad Article to the second sentence must
therefore mean something else. It requires a different standard, just as
‘directly competitive or substitutable products’ requires a
different standard as compared to ‘like products’ for these same
interpretive purposes.”(329)
215. The Appellate Body found support for the above approach in
Japan
— Alcoholic Beverages II also in the distinction between “like
products” in the first sentence and “directly competitive or
substitutable products” in Note Ad Article
III:
“Reinforcing this conclusion is the need to give due meaning to the
distinction between ‘like products’ in the first sentence and ‘directly
competitive or substitutable products’ in the Ad Article to the second
sentence. If ‘in excess of’ in the first sentence and ‘not
similarly taxed’ in the Ad Article to the second sentence were
construed to mean one and the same thing, then ‘like products’ in
the first sentence and ‘directly competitive or substitutable products’
in the Ad Article to the second sentence would also mean one and the
same thing. This would eviscerate the distinctive meaning that must be
respected in the words of the text.
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. 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.”(330)
Distinction from “so as to afford protection”
216. With respect to the distinction between “not similarly taxed”
and “so as to afford protection” by the Appellate Body in Japan —
Alcoholic Beverages II, see paragraphs 219-227
below.
Methodology of comparison — treatment of dissimilar taxation of
some imported products
217. In
Canada — Periodicals, referring to its Report on Japan —
Alcoholic Beverages II(331), the Appellate Body stated:
“[D]issimilar taxation of even some imported products as compared
to directly competitive or substitutable domestic products is
inconsistent with the provisions of the second sentence of Article III:2. In United States — Section 337, the panel found:
… that the ‘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.(332)”(333)
218. The issue of balancing more favourable treatment of some
imported products against less favourable treatment of other imported
products was also addressed by the Panel on Argentina — Hides and
Leather with respect to Article III:2, first sentence (see
paragraphs
176-177 above, and by the Panel on US — Gasoline (see
paragraph 275 below).(334)
(iv) “so as to afford protection to domestic
production”
General
Relationship with Ad Article — distinction from “not similarly
taxed”
219. In Japan — Alcoholic Beverages II, the Appellate Body drew a
distinction between the term “not similarly taxed” and the term “so
as to afford protection to domestic production” as follows:
“[T]he Panel erred in blurring the distinction between that issue
and the entirely separate issue of whether the tax measure in question
was applied ‘so as to afford protection’. Again, these are separate
issues that must be addressed individually. If ‘directly competitive
or substitutable products’ are not ‘not similarly taxed’, then
there is neither need nor justification under Article
III:2, second
sentence, for inquiring further as to whether the tax has been applied
‘so as to afford protection’. But if such products are ‘not
similarly taxed’, a further inquiry must necessarily be made.”(335)
Relevant factors
General
220. In Japan — Alcoholic Beverages II, the Appellate Body
indicated as follows:
“As in [GATT Panel Report on Japan — Customs Duties, Taxes and
Labelling Practices on Imported Wines and Alcoholic Beverages, BISD
34S/83], we believe that an examination in any case of whether
dissimilar taxation has been applied so as to afford protection requires
a comprehensive and objective analysis of the structure and application
of the measure in question on domestic as compared to imported products.
We believe it is possible to examine objectively the underlying criteria
used in a particular tax measure, its structure, and its overall
application to ascertain whether it is applied in a way that affords
protection to domestic products.
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.”(336)
Relevance of tax differentials
221. In Japan — Alcoholic Beverages II, the Appellate Body held
that the very magnitude of the tax differentials may be evidence of the
protective application of a national fiscal measure:
“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.
…
… The dissimilar taxation must be more than de minimis. It may be
so much more that it will be clear from that very differential that the
dissimilar taxation was applied ‘so as to afford protection’. In
some cases, that may be enough to show a violation. In this case, the
Panel concluded that it was enough. Yet in other cases, there may be
other factors that will be just as relevant or more relevant to
demonstrating that the dissimilar taxation at issue was applied ‘so as
to afford protection’. In any case, the three issues that must be
addressed in determining whether there is such a violation must be
addressed clearly and separately in each case and on a case-by-case
basis. And, in every case, a careful, objective analysis, must be done
of each and all relevant facts and all the relevant circumstances in
order to determine ‘the existence of protective taxation’.(337)”(338)
222. The Appellate Body on Japan — Alcoholic Beverages II supported
its interpretation of the various elements of Article
III:2, second
sentence, by emphasizing the consistency of its analysis with the
customary rules of interpretation of public international law:
“Our interpretation of Article III is faithful to the ‘customary
rules of interpretation of public international law’. WTO rules are
reliable, comprehensible and enforceable. WTO rules are not so rigid or
so inflexible as not to leave room for reasoned judgements in
confronting the endless and ever-changing ebb and flow of real facts in
real cases in the real world. They will serve the multilateral trading
system best if they are interpreted with that in mind. In that way, we
will achieve the ‘security and predictability’ sought for the
multilateral trading system by the Members of the WTO through the
establishment of the dispute settlement system’.”(339)
Relevance of tariffs on subject products
223. The Panel’s approach in Japan — Alcoholic Beverages II
reveals the possible roles of tariffs in a finding that a national
measure has been applied “so as to afford protection to domestic
production”. The Appellate Body agreed with the following finding of
the Panel:(340)
“The Panel took note, in this context, of the statement by Japan
that the 1987 Panel Report erred when it concluded that shochu is
essentially a Japanese product. The Panel accepted the evidence
submitted by Japan according to which a shochu-like product is produced
in various countries outside Japan, including the Republic of Korea, the
People’s Republic of China and Singapore. The Panel noted, however,
that Japanese import duties on shochu are set at 17.9 per cent. At any
rate what is at stake, in the Panel’s view, is the market share of the
domestic shochu market in Japan that was occupied by Japanese-made
shochu. The high import duties on foreign-produced shochu resulted in a
significant share of the Japanese shochu market held by Japanese shochu
producers. Consequently, in the Panel’s view, the combination of
customs duties and internal taxation in Japan has the following impact:
on the one hand, it makes it difficult for foreign-produced shochu to
penetrate the Japanese market and, on the other, it does not guarantee
equality of competitive conditions between shochu and the rest of ‘white’
and ‘brown’ spirits. Thus, through a combination of high import
duties and differentiated internal taxes, Japan manages to ‘isolate’
domestically produced shochu from foreign competition, be it foreign
produced shochu or any other of the mentioned white and brown spirits.”(341)
Relevance of the intent of legislators/regulators
224. In Japan — Alcoholic Beverages II, the Appellate Body
considered that the subjective intent of legislators and regulators in
the drafting and the enactment of a particular measure is irrelevant for
ascertaining whether a measure is applied “so as to afford protection
to domestic production”:
“This third inquiry under Article
III:2, second sentence [‘so as
to afford protection’], 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.”(342)
225. In contrast to its statements in
Japan — Alcoholic Beverages II, the Appellate Body in Canada — Periodicals did ascribe some
significance to the statements of representatives of the Canadian
executive about the policy objectives of the part of the Excise Tax Act
at issue. The Appellate Body did so after finding that “the magnitude
of the dissimilar taxation between imported split-run periodicals and
domestic non-split-run periodicals is beyond excessive, indeed, it is
prohibitive” and that “[t]here is also ample evidence that the very
design and structure of the measure is such as to afford protection to
domestic periodicals”:(343)
“The Canadian policy which led to the enactment of Part V.1 of the
Excise Tax Act had its origins in the Task Force Report. It is clear
from reading the Task Force Report that the design and structure of Part
V.1 of the Excise Tax Act are to prevent the establishment of split-run
periodicals in Canada, thereby ensuring that Canadian advertising
revenues flow to Canadian magazines. Madame Monique Landry, Minister
Designate of Canadian Heritage at the time the Task Force Report was
released, issued the following statement summarizing the Government of
Canada’s policy objectives for the Canadian periodical industry:
‘The Government reaffirms its commitment to protect the economic
foundations of the Canadian periodical industry, which is a vital
element of Canadian cultural expression. To achieve this objective, the
Government will continue to use policy instruments that encourage the
flow of advertising revenues to Canadian magazines and discourage the
establishment of split-run or “Canadian” regional editions with
advertising aimed at the Canadian market. We are committed to ensuring
that Canadians have access to Canadian ideas and information through
genuinely Canadian magazines, while not restricting the sale of foreign
magazines in Canada.’
Furthermore, the Government of Canada issued the following response
to the Task Force Report:
‘The Government reaffirms its commitment to the long-standing
policy of protecting the economic foundations of the Canadian periodical
industry. To achieve this objective, the Government uses policy
instruments that encourage the flow of advertising revenues to Canadian
periodicals, since a viable Canadian periodical industry must have a
secure financial base.’
During the debate of Bill C-103, An Act to Amend the Excise Tax Act
and the Income Tax Act, the Minister of Canadian Heritage, the
Honourable Michel Dupuy, stated the following:
‘… the reality of the situation is that we must protect ourselves
against split-runs coming from foreign countries and, in particular,
from the United States.’
Canada also admitted that the objective and structure of the tax is
to insulate Canadian magazines from competition in the advertising
sector, thus leaving significant Canadian advertising revenues for the
production of editorial material created for the Canadian market. With
respect to the actual application of the tax to date, it has resulted in
one split-run magazine, Sports Illustrated, to move its production for
the Canadian market out of Canada and back to the United States. Also,
Harrowsmith Country Life, a Canadian-owned split-run periodical, has
ceased production of its United States’ edition as a consequence of
the imposition of the tax.”(344)
226. In
Korea — Alcoholic Beverages, Korea appealed the Panel’s
finding that the Korea tax measures were inconsistent with Article
III:2, second sentence, on the ground that the Panel ignored the
explanation provided by Korea of the structure of the subject Korean
taxation on liquor products. The Appellate Body rejected Korea’s
argument and expressed its agreement with the Panel’s approach:
“Although [the Panel] considered that the magnitude of the tax
differences was sufficiently large to support a finding that the
contested measures afforded protection to domestic production, the Panel
also considered the structure and design of the measures. In addition,
the Panel found that, in practice, ‘[t]here is virtually no imported
soju so the beneficiaries of this structure are almost exclusively
domestic producers’. In other words, the tax operates in such a way
that the lower tax brackets cover almost exclusively domestic
production, whereas the higher tax brackets embrace almost exclusively
imported products. In such circumstances, the reasons given by Korea as
to why the tax is structured in a particular way do not call into
question the conclusion that the measures are applied ‘so as to afford
protection to domestic production’. Likewise, the reason why there is
very little imported soju in Korea does not change the pattern of
application of the contested measures.”(345)
227. In
Chile — Alcoholic Beverages, the Appellate Body examined
Chile’s claim that the subject taxation on alcoholic beverages was
aimed at, among others, reducing the consumption of alcoholic beverages
with higher alcohol content. The Appellate Body again refused to accept
explanations of policy objectives which were not ascertainable from the
objective design, architecture and structure of the measure and
supported the Panel’s attempts to “relate the observable structural
features of the measure with its declared purposes”:
“We recall once more that, in Japan — Alcoholic
Beverages, we
declined to adopt an approach to the issue of ‘so as to afford
protection’ that attempts to examine ‘the many reasons legislators
and regulators often have for what they do’.(346) We called for
examination of the design, architecture and structure of a tax measure
precisely to permit identification of a measure’s objectives or
purposes as revealed or objectified in the measure itself. Thus, we
consider that a measure’s purposes, objectively manifested in the
design, architecture and structure of the measure, are intensely
pertinent to the task of evaluating whether or not that measure is
applied so as to afford protection to domestic production. In the
present appeal, Chile’s explanations concerning the structure of the
New Chilean System — including, in particular, the truncated nature of
the line of progression of tax rates, which effectively consists of two
levels (27 per cent ad valorem and 47 per cent ad valorem) separated by
only 4 degrees of alcohol content — might have been helpful in
understanding what prima facie appear to be anomalies in the progression
of tax rates. The conclusion of protective application reached by the
Panel becomes very difficult to resist, in the absence of countervailing
explanations by Chile. The mere statement of the four objectives pursued
by Chile does not constitute effective rebuttal on the part of Chile.
At the same time, we agree with Chile that it would be inappropriate,
under Article III:2, second sentence, of the GATT 1994, to examine
whether the tax measure is necessary for achieving its stated objectives
or purposes. The Panel did use the word ‘necessary’ in this part of
its reasoning. Nevertheless, we do not read the Panel Report as showing
that the Panel did, in fact, conduct an examination of whether the
measure is necessary to achieve its stated objectives. It appears to us
that the Panel did no more than try to relate the observable structural
features of the measure with its declared purposes, a task that is
unavoidable in appraising the application of the measure as protective
or not of domestic production.”(347)
Reference to GATT practice
228. For GATT practice on this subject-matter.
Footnotes:
126. Panel Report on US — Certain EC Products, para. 6.58. On this
issue, the following minority view was expressed:
“… Any bonding requirements to cover the payment of tariffs above
their bound levels cannot be viewed as a mechanism in place to secure
compliance with WTO compatible tariffs and constituted, therefore,
import restrictions for which there was no justification. The actual
trade effects of the 3 March Measure … confirm its restrictive nature
and effect. One Panelist found, therefore, that the 3 March Measure
constituted a ‘restriction’, contrary to Article XI of
GATT, rather
than a duty or charge under Article II.”, para. 6.61. back to text
127. Appellate Body Report on US — Certain EC Products, paras. 103-104. back to text
128. Panel Report on Korea — Various Measures on Beef, para. 779. back to text
129. WT/L/407. back to text
130. G/MA/M/10, para. 4. The agreement is outlined in G/MA/IDB/1/Rev.1. back to text
131. G/MA/M/10, para. 4. The text of the agreement can be found in
WT/L/225. back to text
132. G/MA/M/12, para. 3. The text of the adopted decisions can be
found in G/MA/IDB/1/Rev.1/Add.1. back to text
133. G/MA/M/18, para. 2.7. The text of the adopted document can be
found in G/MA/IDB/3. back to text
134. G/MA/M/27, para. 1. back to text
135. G/MA/115. back to text
136. See G/MA/115/Add.1 and Add.2. back to text
137. G/MA/M/4, para. 1.2. back to text
138. See G/C/W/98/Rev.1, para. 9.1. The text of the adopted Decision
can be found in G/L/138. back to text
139. G/MA/M/13, para. 5. back to text
140. G/MA/M/25, para. 1. back to text
141. G/M/115. back to text
142. See G/MA/115/Add.1
and Add.2. back to text
143. WT/MIN(96)/16. back to text
144. WT/MIN(96)/16, para. 2. back to text
145. See G/IT/1/Rev.33. back to text
146. G/L/160, para. 3. The Committee’s rules of procedure provide
for observer status in the Committee to WTO Members which are not
parties, and governments that are observers to the Council for Trade in
Goods. Furthermore, requests for observer status by international
intergovernmental organizations would be considered on a case-by-case
basis. back to text
147. G/IT/M/2, para. 1.5. The text of the Rules of Procedure can be
found in G/IT/3. back to text
148. G/IT/19. back to text
149. (footnote original) Panel Report on
US — Sugar, para. 5.2. back to text
150. Appellate Body Report on EC — Bananas III, para. 154. back to text
151. (footnote original) Adopted 22 June 1989, BISD 36S/331, para.
5.2. back to text
152. Adopted 25 September 1997, WT/DS27/AB/R, para. 154. back to text
153. Appellate Body Report on EC — Poultry, para. 98. back to text
154. Panel Report on Canada — Dairy, para. 7.151. back to text
155. Panel Report on Canada — Dairy, para. 7.152. back to text
156. Panel Report on Canada — Dairy, paras. 7.151-7.155. back to text
157. (footnote original) The United States contends, on the basis of
the panel report in United States — Restrictions on Imports of Sugar
(supra, footnote 52), that “terms and conditions” may encompass “additional
concessions”. We take no position as to whether “terms and
conditions” may encompass “additional concessions”; but we do,
however, note that, even assuming that the United States is correct on
this point, an “additional concession” may well embody a
qualification to a concession by expanding its scope or adding to it. back to text
158. (footnote original) Panel Report, para. 7.151. back to text
159. (footnote original) Ibid., para. 7.152. back to text
160. Appellate Body Report on Canada —
Dairy, paras. 134-136. back to text
161. Appellate Body Report on Canada —
Dairy, para. 143. back to text
162. Panel Report on EC — Computer Equipment, para. 8.60. back to text
163. Appellate Body Report on EC — Computer Equipment, para. 84. The
Appellate Body confirmed this finding in Canada — Dairy. Appellate Body Report on Canada —
Dairy, para. 131. back to text
164. Panel Report on EC — Computer Equipment, para. 8.31. back to text
165. Panel Report on EC — Computer Equipment, para. 8.60. back to text
166. (footnote original) MTN.TNC/W/131, 21 January 1994. See also
Marrakesh Protocol to the General Agreement on Tariffs and Trade 1994,
para. 3. back to text
167. Panel Report on EC — Computer Equipment, para. 8.60. back to text
168. Appellate Body Report on EC — Computer Equipment, paras. 109-110.
This finding was referred to by the Panel on Korea — Procurement, in
relation to the interpretation of Annexes to the Agreement on Government
Procurement, which specify the coverage of the Agreement for each Party.
See Chapter on Agreement on Government Procurement, Section
XXVI. back to text
169. (footnote original) Appellate Body Report
on US — Wool Shirts and Blouses, p. 14. See also, Appellate Body Report on EC —
Hormones,
paras. 97-109. back to text
170. Appellate Body Report on EC — Computer Equipment,
para. back to text
171. Appellate Body Report on EC — Computer Equipment,
para. back to text
172. Appellate Body Report on EC — Computer Equipment,
para. 89. back to text
173. Appellate Body Report on EC — Computer Equipment,
para. 90. back to text
174. Appellate Body Report on EC — Computer Equipment,
para. 92.
This reasoning was reiterated and followed in Canada — Dairy, where
the Appellate Body addressed a complaint that Canadian administration of
tariff-rate quota on fluid milk was inconsistent with GATT Article
II:1(b). Appellate Body Report on Canada —
Dairy, para. 132. back to text
175. Appellate Body Report on EC — Computer Equipment,
para. 93. back to text
176. Appellate Body Report on EC — Computer Equipment,
paras. 95-96. back to text
177. Panel Report on Argentina — Textiles and Apparel, paras. 6.31-6.32. back to text
178. Panel Report on Argentina — Textiles and Apparel, para. 6.31. back to text
179. Panel Report on Argentina — Textiles and Apparel, para. 6.65. back to text
180. Appellate Body Report on Argentina — Textiles and Apparel, para.
46. back to text
181. Appellate Body Report on Argentina — Textiles and Apparel, para.
55. back to text
182. Appellate Body Report on Argentina — Textiles and Apparel,
paras. 53-54. back to text
183. Appellate Body Report on Chile — Price Band
System, para. 285. back to text
184. Appellate Body Report on Argentina — Textiles and Apparel, para.
45. back to text
185. Appellate Body Report on EC — Computer Equipment,
para. 81. back to text
186. Appellate Body Report on EC — Computer Equipment,
para. 84.
back to text
187. Panel Report on Korea — Various Measures on Beef, para. 780.
With respect to judicial economy in general, see Chapter on DSU,
Section XXXVI.F. back to text
188. Appellate Body Report on EC — Bananas III,
para. 155.
back to text
189. Following this paragraph, the Panel cited Panel Report on
US — Sugar, paras. 5.1-5.7. back to text
190. Panel Report on EC — Bananas III, paras. 7.113-7.114. In
support of its finding, the Panel cited Appellate Body Report on
Japan — Alcoholic
Beverages II, p.15, as stating that “[a]dopted panel
reports are an important part of the GATT acquis. They are often taken
into account by subsequent panels. They create legitimate expectations
among Members, and, therefore should be taken into account where they
are relevant to any dispute”. back to text
191. Panel Report on Korea — Various Measures on Beef, para. 780.
With respect to judicial economy in general, see Chapter on DSU,
Section XXXVI.F. back to text
192. Appellate Body Report on Chile — Price Band
System, para. 190.
back to text
193. Panel Report on Canada — Dairy, para. 7.157.
back to text
194. (footnote original) Panel Report on
US — Section 337, para.
5.10. back to text
195. (footnote original) Panel Reports on
US — Superfund, para.
5.1.9; and Japan — Alcoholic Beverages II, para. 5.5(b). back to text
196. (footnote original) Panel Report on
Italy — Agricultural Machinery, para. 11. back to text
197. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 16.
back to text
198. Appellate Body Report on Korea — Alcoholic
Beverages, para.
119; Appellate Body Report on Chile — Alcoholic Beverages, para. 67;
and Appellate Body Report on EC — Asbestos, para. 97. See also Panel
Report on Indonesia — Autos, para. 14.108. back to text
199. Appellate Body Report on Korea — Alcoholic
Beverages, para.
120. back to text
200. (footnote original) Panel Reports on
US — Tobacco, para. 99;
US — Malt Beverages, para. 5.6; Canada — Provincial Liquor Boards
(EEC), para. 5.6; US — Section 337, para. 5.13; US —
Superfund, para.
5.1.9; Brazil — Internal Taxes, para. 15. back to text
201. Appellate Body Report on Canada —
Periodicals, p. 18.
back to text
202. Panel Report on Argentina — Hides and
Leather, para. 11.182.
(emphasis added) back to text
203. Panel Report on Japan — Alcoholic Beverages II, para. 6.13.
back to text
204. Appellate Body Report on
Japan — Alcoholic
Beverages II, pp. 16-17.
back to text
205. (footnote original) See Commission v.
France, Case 168/78, 1980
ECR 347; Commission v. Kingdom of Denmark, Case 171/78, 1980 ECR 447;
Commission v. Italian Republic, Case 319/81, 1983 ECR 601; Commission v
Hellenic Republic, Case 230/89, 1991 ECR 1909. back to text
206. (footnote original) Council Regulation No. 4064/89 of 21
December 1989 on the control of concentrations between undertakings. back to text
207. (footnote original) Case No. IV/M 938 —
Guinness/Grand Metropolitan. back to text
208. (footnote original) Commission v.
Italy, Case 184/85, 1987 ECR
2013. back to text
209. (footnote original) United Brands v.
Commission, Case 27/76,
1978 ECR 207. back to text
210. (footnote original) In finding the relationship of the
provisions to each other relevant, we do not intend to imply that we
have adopted the market definitions defined in these or other ECJ cases
for purposes of this decision. back to text
211. Panel Report on Korea — Alcoholic
Beverages, para. 10.81.
back to text
212. Panel Report on Argentina — Hides and
Leather, para. 11.145.
back to text
213. Panel Report on Argentina — Hides and
Leather, paras. 11.150
and 11.154. back to text
214. Appellate Body Report on EC — Bananas III,
para. 211.
back to text
215. Panel Report on Korea — Various Measures on Beef, para. 766.
back to text
216. Appellate Body Report on
Japan — Alcoholic
Beverages II, p.16.
back to text
217. (footnote original) See the Panel Reports on
US — Superfund,
para. 5.2.4, EEC — Parts and Components, para. 5.6. back to text
218. Panel Report on Argentina — Hides and
Leather, para. 11.144.
back to text
219. Panel Report on Japan — Alcoholic Beverages II, para. 6.15.
back to text
220. Appellate Body Report on
Japan — Alcoholic
Beverages II, pp. 18-19.
back to text
221. Appellate Body Report on EC — Bananas III,
paras. 216 and 241.
back to text
222. (footnote original) Panel Report on
US — Superfund, para.
5.1.9. back to text
223. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 16. This statement was endorsed in Korea — Alcoholic
Beverages. Appellate Body Report on Korea — Alcoholic
Beverages, para. 119. See
also Panel
Report on Indonesia — Autos, para. 14.108. back to text
224. (footnote original) Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 16. back to text
225. Appellate Body Report on Canada —
Periodicals, p. 18.
back to text
226. Panel Report on Korea — Various Measures on Beef, paras. 753
and 757. back to text
227. Panel Report on US — Gasoline, para. 6.17.
back to text
228. (footnote original) US — Malt
Beverages, para. 5.2.
back to text
229. Panel Report on US — Gasoline, para. 6.17.
back to text
230. Appellate Body Report on
Japan — Alcoholic
Beverages II, pp. 17-18.
back to text
231. With respect to this issue, see also Panel Report on
Japan — Film, para. 10.371. back to text
232. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 19.
back to text
233. Appellate Body Report on Canada —
Periodicals, pp. 22-23.
back to text
234. Appellate Body Report on Canada —
Periodicals, p. 19.
back to text
235. Appellate Body Report on Canada —
Periodicals, p. 28.
back to text
236. (footnote original) Panel Report on Japan — Alcoholic Beverages II, para. 6.22, approved by the Appellate Body at p. 23 of its
Report. back to text
237. (footnote original) Appellate Body Reports on
Japan — Alcoholic
Beverages II, p. 20, and Canada — Periodicals, p. 21. back to text
238. (footnote original) Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 25. back to text
239. (footnote original) Appellate Body Report on Canada —
Periodicals, p. 28. back to text
240. Appellate Body Report on Korea — Alcoholic
Beverages, para.
118. back to text
241. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 24.
Two panels cited this finding and stated that “Ad Article
III has
equal stature under international law as the GATT language to which it
refers, pursuant to Article XXXIV.” Panel Report on Korea — Alcoholic
Beverages, footnote. 346; and Panel Report on
Chile —
Alcoholic Beverages, footnote.
349. back to text
242. Appellate Body Report on
Japan — Alcoholic
Beverages II, pp. 18-19.
back to text
243. Appellate Body Report on Canada —
Periodicals, pp. 22-23.
back to text
244. (footnote original) We find further support for our view in the
following statement made by the Appellate Body in its report on EC — Bananas III, supra, at para. 216:
“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’.”
While this statement relates to Article III:4 of the
GATT, which is
not at issue in the present case, it nevertheless provides useful
clarification for purposes of analysing Argentina’s argument in
respect of Article III:2, first sentence. It clearly emerges from this
statement that not only is there no requirement separately to establish
the presence of a protective application, but that there is not even a
requirement separately to consider whether there is a protective
application. back to text
245. (footnote original) We note Argentina’s contention that the
GATT 1947 panel reports on Japan — Alcoholic Beverages I; US —
Section 337, and US — Malt Beverages, lend support to its view that
the presence of a protective application must be established for
purposes of a claim under Article III:2, first sentence. See paras.
8.228 et seq. of this report. Since all of the aforementioned reports
pre-date the Appellate Body
reports on
Japan — Alcoholic
Beverages II and EC — Bananas III and since those Appellate Body reports directly
address the issue before us, we see no need to further consider the GATT
1947 reports in this regard. back to text
246. Panel Report on Argentina — Hides and
Leather, para. 11.137.
back to text
247. Panel Report on Japan — Alcoholic Beverages II, para. 6.14.
back to text
248. (footnote original) Report of the Working Party on
Border Tax Adjustments, BISD 18S/97, para. 18. back to text
249. (footnote original) Panel Reports on
Australia — Ammonium
Sulphate; EEC — Animal Proteins; Spain — Unroasted
Coffee; Japan —
Alcoholic Beverages I; US — Superfund. Also see Panel Report on US — Gasoline. back to text
250. Appellate Body Report on
Japan — Alcoholic
Beverages II, pp. 19-21. back to text
251. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 25. back to text
252. Panel Report on Japan — Alcoholic Beverages II, para. 6.20. back to text
253. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 21. back to text
254. (footnote original) Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 20. back to text
255. Appellate Body Report on Canada —
Periodicals, pp. 20-21. back to text
256. (footnote original) Appellate Body Report on Canada —
Periodicals, pp. 20-21. back to text
257. Panel
Report on Indonesia — Autos, para. 14.113. back to text
258. (footnote original) As the Appellate Body has stated in
US —
Wool Shirts and Blouses, p. 14:
“In the context of the GATT 1994 and the WTO
Agreement, precisely
how much and precisely what kind of evidence will be required to
establish such a presumption will necessarily vary from measure to
measure, provision to provision, and case to case.” back to text
259. (footnote original) In our view, the mere fact that a product
is of non-Argentinean origin or that it is being definitively imported
into Argentina does not, per se, distinguish it — in terms of its
physical characteristics and end-uses — from a product of Argentinean
origin or a product which is being sold inside Argentina. Nor does
likeness turn on whether the sellers or purchasers of the products under
comparison qualify as registered or non-registered taxable persons or as
agentes de percepción under Argentinean tax law. back to text
260. (footnote original) This view is unaffected by the fact that,
according to the Appellate Body, the term “like products”, as it
appears in Article III:2, first sentence, is to be construed narrowly
and on a case-by-case basis. See the Appellate Body Report on Japan —
Alcoholic Beverages, pp. 19-20. back to text
261. (footnote original) Panel
Report on Indonesia — Autos, para.
14.113. See also the Panel Reports on Korea — Various Measures on Beef, para. 627 (with respect to
Article III:4 of the GATT 1994) and US
— Certain EC Products, para. 6.54 (with respect to Article I:1 of the
GATT 1994). back to text
262. Panel Report on Argentina — Hides and
Leather, paras. 11.168-11.170. back to text
263. The Appellate Body cited Report of the Working Party on
Border
Tax Adjustments, BISD 18S/97, para. 18. back to text
264. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 20.
In Indonesia — Autos, the Panel followed this finding of the Appellate
Body. Panel
Report on Indonesia — Autos, para. 14.109. back to text
265. Appellate Body Report on Canada —
Periodicals, pp. 21-22. back to text
266. Panel Report on Argentina — Hides and
Leather, para. 11.167. back to text
267. (footnote original) Panel Reports on
EEC — Animal Proteins;
Japan — Alcoholic Beverages I; and US — Gasoline. back to text
268. (footnote original) Panel Report on
Japan — Alcoholic
Beverages I, para. 5.6. back to text
269. Appellate Body Report on
Japan — Alcoholic
Beverages II, pp. 21-22. back to text
270. Appellate Body Report on
Japan — Alcoholic
Beverages II, p.22. back to text
271. (footnote original) See the Panel Reports on
US — Superfund,
para. 5.2.4, EEC — Parts and Components, para. 5.6. back to text
272. Panel Report on Argentina — Hides and
Leather, paras. 11.143-11.144. back to text
273. Appellate Body Report on
Japan — Alcoholic
Beverages II, p.23.
This finding was followed by the Panel on Argentina — Hides and
Leather. Panel Report on Argentina — Hides and
Leather, para. 11.243. back to text
274. (footnote original) Appellate Body Report on
Canada — Periodicals, p. 18. back to text
275. (footnote original) Panel Report on
Japan — Alcoholic
Beverages I, para. 5.8. back to text
276. Panel Report on Argentina — Hides and
Leather, paras. 11.182-11.184. back to text
277. (footnote original) See Panel Report on
US — Tobacco, para.
98. For reports with respect to Article III:4 of the GATT
1994, see the
Panel Reports on US — Section 337, para. 5.14; US — Gasoline, para.
6.14. back to text
278. Panel Report on Argentina — Hides and
Leather, para. 11.260. back to text
279. Further, with respect to the methodology of comparison in
identifying “directly competitive and substitutable products” under
the second sentence of Article III:2, see paras. 194-210 of this
Chapter. back to text
280. Panel Report on Argentina — Hides and
Leather, para. 11.245. back to text
281. (footnote original) See also the
Panel Reports on US — Gasoline, supra, para. 6.11; United States — Alcoholic
Beverages, para.
5.19. These panels held that differential regulatory or tax treatment of
imported and like domestic products cannot be maintained, consistently
with Article III, on the basis that the characteristics and
circumstances of the producers of those products are different. The same
logic must apply, in our view, to cases where tax distinctions between
like imported and domestic products are based on the characteristics and
circumstances of the sellers or purchasers of those products. back to text
282. (footnote original) See the Panel Reports on US — Gasoline,
para. 6.11; United States — Alcoholic Beverages, para. 5.19. See also
footnote 499 of this report. The disciplines of Article
III:2, first
sentence, are of course subject to whatever exceptions a Member may
justifiably invoke. back to text
283. Panel Report on Argentina — Hides and
Leather, paras. 11.210
and 11.220. back to text
284. The footnote to this sentence refers to Appellate Body Report on
Alcoholic — Beverages, pp. 19-20; Appellate Body Report on Canada —
Periodicals, p. 22. back to text
285. Panel
Report on Indonesia — Autos, para. 14.112. back to text
286. Panel Report on Argentina — Hides and
Leather, para. 11.144. back to text
287. Appellate Body Report on Canada —
Periodicals, p. 18. back to text
288. Panel Report on Argentina — Hides and
Leather, para. 11.160,
which refers to the Appellate Body Report on Canada —
Periodicals, p. 20. back to text
289. (footnote original) See the Working Party Report on Border Tax
Adjustments, adopted on 2 December 1970, BISD 18S/97, at para. 14. back to text
290. Panel Report on Argentina — Hides and
Leather, para. 11.159. back to text
291. Appellate Body Report on
Japan — Alcoholic
Beverages II, p.24.
This part has been later cited and endorsed by the Appellate Body, in Appellate Body Report on Canada —
Periodicals, pp. 24-25, and in Appellate Body Report on Chile — Alcoholic Beverages, para. 47. back to text
292. Panel Report on Japan — Alcoholic Beverages II, para. 6.28. back to text
293. Appellate Body Report on Korea — Alcoholic
Beverages, para.
156. With respect to the burden of proof in general, see Chapter on the
DSU, Section XXXVI.D. back to text
294. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 25. back to text
295. (footnote original) Appellate Body Report on
Japan — Alcoholic
Beverages II, fn. 20. back to text
296. Appellate Body Report on Korea — Alcoholic
Beverages, para.
121. back to text
297. (footnote original) Appellate Body Report on Korea — Alcoholic
Beverages, para. 120. back to text
298. Appellate Body Report on Korea — Alcoholic
Beverages, para.
134. back to text
299. (footnote original) Appellate Body Reports on
Japan — Alcoholic
Beverages II, fn. 20 and Canada — Periodicals, fn. 91. back to text
300. (footnote original) Panel Report on Japan — Alcoholic Beverages II, fn. 16, with reference to Working Party Report on Border
Tax Adjustments, L/3464, BISD 18S/97, para. 18, approved by the Appellate Body Report on
Japan — Alcoholic
Beverages II, fn. 20. back to text
301. Appellate Body Report on Korea — Alcoholic
Beverages, para.
137. back to text
302. Appellate Body Report on Korea — Alcoholic
Beverages, para.
127. back to text
303. (footnote original) Appellate Body Report on Canada —
Periodicals. back to text
304. Appellate Body Report on Korea — Alcoholic
Beverages, paras.
114-115. back to text
305. Appellate Body Report on Korea — Alcoholic
Beverages, para.
116. back to text
306. Appellate Body Report on Korea — Alcoholic
Beverages, para.
117. back to text
307. (footnote original) Appellate Body Report on
Japan — Alcoholic
Beverages II, footnote 20. back to text
308. Appellate Body Report on Korea — Alcoholic
Beverages, para.
119. back to text
309. Panel Report on Japan — Alcoholic Beverages II, para. 6.28. back to text
310. (footnote original) Panel Report on
Japan — Alcoholic
Beverages I. The panel in Japan — Alcoholic Beverages II cited para.
5.9 of this panel report. back to text
311. (footnote original) Panel Report on Japan — Alcoholic Beverages II, footnote 16, para. 6.28. This excerpt was expressly
approved by the Appellate Body in its Report in this case (p. 25). back to text
312. (footnote original) Panel Report on Japan — Alcoholic Beverages II, footnote 16, para. 6.28. back to text
313. Appellate Body Report on Korea — Alcoholic
Beverages, para.
120. back to text
314. Appellate Body Report on Korea — Alcoholic
Beverages, paras.
122-124. back to text
315. Appellate Body Report on Canada —
Periodicals, p. 28. back to text
316. (footnote original) Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 25. back to text
317. Panel Report on Korea — Alcoholic
Beverages, paras. 10.37-10.40. back to text
318. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 25. back to text
319. Appellate Body Report on Korea — Alcoholic
Beverages, para. back to text
320. Panel Report on Korea — Alcoholic
Beverages, para. 10.61. back to text
321. (footnote original) Panel Report on Korea — Alcoholic
Beverages, para. 10.60. back to text
322. (footnote original) We note that the panels in
Japan —
Alcohol Beverages I and in Japan — Alcoholic Beverages II, followed
the same approach. This approach was implicitly approved in our Report
on Japan — Alcoholic Beverages II. back to text
323. Appellate Body Report on Korea — Alcoholic
Beverages, paras.
141-144. back to text
324. (footnote original) Panel Report on Japan — Alcoholic Beverages II, footnote 16, approved by the Appellate Body at p. 23 of
its Report. back to text
325. (footnote original) Appellate Body Reports on
Japan — Alcoholic
Beverages II, footnote 20, and
Canada — Periodicals,
footnote 91. back to text
326. (footnote original) Appellate Body Report on
Japan — Alcoholic
Beverages II, footnote 20. back to text
327. (footnote original) Appellate Body Report on Canada —
Periodicals, footnote 91. back to text
328. Appellate Body Report on Korea — Alcoholic
Beverages, para.
118. back to text
329. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 26. back to text
330. Appellate Body Report on
Japan — Alcoholic
Beverages II, pp. 26-27.
This “de minimis” standard was endorsed by the Appellate Body
in Canada —
Periodicals (Appellate Body Report on Canada —
Periodicals,
p. 29); in Chile — Alcoholic Beverages (Appellate Body Report on Chile — Alcoholic Beverages, para. 49.). Also, the Panel on Indonesia Autos
followed it. Panel
Report on Indonesia — Auto, para. 14.115. back to text
331. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 27. back to text
332. (footnote original) GATT Panel Report on
US — Section 337,
BISD 36S/345, para. 5.14. back to text
333. Appellate Body Report on Canada —
Periodicals, p. 29. back to text
334. Further, with respect to the methodology of comparison in
identifying “directly competitive and substitutable products” under
the second sentence of Article III:2, see paras. 194-210 of this
Chapter. Also with respect to this issue under Article
III:4, see paras.
242-247 of this Chapter. back to text
335. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 27. back to text
336. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 29. back to text
337. (footnote original) Panel Report on
Japan — Alcoholic
Beverages I, para. 5.11. See also Appellate Body Report on Canada —
Periodicals, p. 30. back to text
338. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. back to text
339. Appellate Body Report on
Japan — Alcoholic
Beverages II, pp. 29-31. back to text
340. Appellate Body Report on
Japan — Alcoholic
Beverages II, p. 31. back to text
341. Panel Report on Japan — Alcoholic Beverages II, para. 6.35. back to text
342. Appellate Body Report on
Japan — Alcoholic
Beverages II, pp. 27-28. back to text
343. Appellate Body Report on Canada —
Periodicals, p. 32. back to text
344. Appellate Body Report on Canada —
Periodicals, pp. 30-32. back to text
345. Appellate Body Report on Korea — Alcoholic
Beverages, para.
150. back to text
346. (footnote original) Appellate Body Report on
Japan — Alcoholic
Beverages II, fn. 20. back to text
347. Appellate Body Report on Chile — Alcoholic Beverages, paras. 71-72. back to text
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