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BTW3201 International Trade Law

GATT and international trade (Part I)
- WTO
- Most favoured nation principle
- National treatment obligation

Gan Joo Ee

Accredited by: Advanced Signatory:

World Trade Organization (WTO)
What is the WTO?
• The WTO is an intergovernmental organization that is concerned with
the rules of trade between states.
• The International Trade Organization (ITO) could be said to be the
precursor to the WTO. The ITO was established after the World War II,
with the purpose of regulating international trade and reducing trade
barriers. This was because trade barriers were seen as some of the
reasons that triggered World War II.
• At the same time, negotiations among states have resulted in the
1947 General Agreement on Tariffs and Trade (GATT).
• The ITO lost its influence because the US did not ratify its agreement
into domestic law.
• The WTO was established when 123 countries signed the Marrakesh
Agreement on 15 April 1994. MONASH
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• The WTO officially commenced on 1 January 1995.
World Trade Organization (WTO)
What is the relationship between WTO and GATT?
• The 1947 GATT preceded the WTO.
• Does this mean that the WTO render the GATT redundant? No.
• The WTO requires all members to sign and adhere to the provisions of
the GATT.

What happens if a member fails to adhere to the GATT?

• Another state can bring a complaint against the non-compliant state.
• Is there a procedure to bring such complaints? Yes.
• A dispute resolution mechanism is established pursuant to The
Understanding on Rules and Procedures Governing the
Settlement of Disputes (DSU).
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World Trade Organization (WTO)
What are the organs within the WTO’s dispute resolution
mechanism?
• The Dispute Settlement Body (DSB): Sets up a panel to consider a
complaint, determines whether to adopt the recommendations of the
panel and implement rulings.

• The Dispute Settlement Panels: The DSB establishes such panels to

assess complaints and make recommendations to it. Where there is
no appeal, the DSB usually adopts the panel’s report.

• The Appellate Body: Reviews the legal issues contained in a panel’s

report. It can uphold, modify or reverse the findings of a panel. Where
this is the case, the DSB will adopt the Appellate Body’s report (unless
it decides by consensus not to do so). MONASH
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World Trade Organization (WTO)

Appellate Body

Report (under review)

Decision

Complaint Dispute Settlement Panel

(by state parties) Body (DSB) (set up by DSB)

Decision Report (not under review) MONASH

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World Trade Organization (WTO)
What happens when a member state violates the provisions of
GATT?
Once the DSB has communicated its decision to the relevant state
parties, it is responsible for monitoring compliance. Where a state fails to
comply with its decision, it can compel the non-complying state to pay
compensation or authorize the injured state to retaliate.

China – Measures related to the exportation of rare earths, tungsten and

molybdenum (DS431)
- On 13 March 2012, the US requested consultations with China
concerning China’s restrictions on the export of rare earths, tungsten
and molybdenum.
- The US claimed that these restrictions violated Articles VII, VIII, X and
XI of GATT and China’s Protocol of Accession. MONASH
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- Canada, EU and Japan subsequently joined the consultations.
World Trade Organization (WTO)
- A Panel was set up to consider the matter.
- China argued that the restrictions were imposed to conserve its
exhaustible natural resources. It sought to rely on the exceptions in
Article XX that permit the conservation of exhaustible natural
resources.
- US and other countries argued that the restrictions were intended to
protect China’s industries.
- The Panel reached the conclusion that China had violated the GATT.
- The decision was affirmed by the Appellate Body.

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World Trade Organization (WTO)
How effective are retaliatory measures pursuant to a WTO ruling?
• To begin with, the WTO cannot ‘enforce’ a decision in the way that we
commonly associate with a court judgment. It must be remembered
that the member states of the WTO are sovereign countries.
• Trade inequalities between member states should also be factored in.
Assuming that the non-complying state is economical powerful, an
injured state that is economically weaker probably cannot retaliate
effectively even if it is allowed to do so pursuant to a WTO decision.
• For example, Country X (developed, population: 300 million) violated
the GATT. Country Y (developing, population: 20 million) imposed
higher tariffs on specific goods from Country X. Consequently, these
goods are priced higher in Country Y and became uncompetitive. But
Country Y is a developing country with a small market, where the
consumer’s purchasing power is still weak. The lack of demand for
Country X’s goods has limited impact on Country X. MONASH
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The GATT : Rationale
What is the purpose behind the GATT?
• The main purpose of the GATT is to promote trade liberalization.
• The next question: Why is trade liberalization important?
• The WTO is tasked with the goal of reducing trade inequalities
between the members and promoting global justice. To this end, the
provisions in GATT seek to ‘open’ the markets of developed countries
so that developing countries can access wealthier markets. This is
achieved through preferential market access which is usually
unilateral.
• When developed countries open “their markets to exports from smaller
economies on a preferential basis, larger economies in effect place
the consumption power of their larger, richer consumer market at the
service of the smaller economies, which can increase their exports
and thereby strengthen their economic base.” (Di Lieto & Treisman,
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The GATT : Most favoured nation
Which GATT provision lays down the ‘most favoured nation’
principle?

Article I of the GATT states:

“1. With respect to customs duties and charges of any kind imposed on
or in connection with importation or exportation or imposed on the
international transfer of payments for imports or exports, and with
respect to the method of levying such duties and charges, and with
respect to all rules and formalities in connection with importation and
exportation, and with respect to all matters referred to in paragraphs 2
and 4 of Article III,* any advantage, favour, privilege or immunity granted
by any contracting party to any product originating in or destined for any
other country shall be accorded immediately and unconditionally to the
like product originating in or destined for the territories of all other
contracting parties.” MONASH
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The GATT : Most favoured nation
What is the ‘most favoured nation’ principle?
• Essentially, the most favoured nation principle says that where a
member state grants any trade advantage or privileges to another
member state, the same advantage or privileges shall be accorded to
all other member states.
• However, take note that the principle only applies to advantage or
privileges in respect of ‘like products’. This can give rise to
interpretative issues – what constitutes ‘like products’?
• For instance, are orange, mandarin and satsuma like products?
Opinions will differ.
• Further, there are exceptions to this principle – which will be
considered at the end of this topic.

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The GATT : Most favoured nation
How do we ascertain whether goods are ‘like products’?
• We can approach this issue from four perspectives:
(a) the physical properties of the products;
(b) the extent to which the products are capable of serving the
same or similar end-uses;
(c) the extent to which consumers perceive and treat the products
as alternative means of performing particular functions in order
to satisfy a particular want or demand; or
(d) the international classification of the products for tariff
purposes.

• In applying these criteria, the Panel could either adopt a narrow or

broad interpretation of ‘like products’.
• Contrast the following cases. MONASH
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The GATT : Most favoured nation
In these two cases, the narrow approach was arguably adopted.
Canada/Japan – Tariff on Imports of Spruce, Pine, Fir (SPF) Dimension
Lumber (1989) (‘Japan – SPF Dimension Lumber Case’)
- Japan placed 8% tariff duty to imports of SPF dimension lumber.
- Canada argued that this violated Article I because the tariff did not
apply to other species of wood.
- Japan claimed that ‘like products’ should be based on tariff
classifications, in which case, the types of woods concerned were
different.
- But if the ‘end-use’ criterion was used, presumably the woods had
similar use.
- The Panel concluded that whether the woods were ‘like products’
should be considered according to tariff classifications. Hence, Japan
was not in violation of Article I. MONASH
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The GATT : Most favoured nation
The Australian Subsidy on Ammonium Sulphate, Chile v. Australia (1950)
(‘Australia – Ammonium Sulphate Case’)
- This concerned the removal of subsidy.
- Australia removed subsidy of sodium nitrate fertilizers but not for
fertilizers containing ammonium sulphate.
- Chile argued that Australia violated Article I because both types of
fertilizers were like products.
- The Panel concluded that the two types of fertilizers were not like
products because they were listed as separate items in the tariff
classifications. Like product is not the same as ‘directly competitive’ or
‘substitutable products’.

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The GATT : Most favoured nation
By contrast, in the following case, a broad interpretation of ‘like
products’ was adopted.
Spain – Tariff Treatment of Unroasted Coffee (1950) (‘Spain – Unroasted
Coffee Case’)
- Spain imposed a tariff of 7% for ‘unroasted/unwashed coffee’. By
contrast, the importation of ‘mild coffee’ into Spain is duty free.
- Brazil complained that Spain violated Article 1.
- The Panel concluded that coffee as an end-use product was ‘intended
for drinking’. The two types of coffee were therefore ‘like products’.

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The GATT : National treatment obligation
Article III of the GATT lays down the national treatment obligation?

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.

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The GATT : National treatment obligation
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.
…..
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 MONASH
on the economic operation of the means of transport and not on the BUSINESS
nationality of the product.
The GATT : National treatment obligation
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.
……

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The GATT : National treatment obligation
What does Article III mean?
• Article III basically says that a member state shall not impose
any tax or charges, or impose any law or place any
quantitative restriction on imported products in order to
protect similar domestic products.
• In other words, imported protects should be treated no less
favourably compared to domestic products.
• The purpose of Article III is to deter protectionist policies.
• Again, the issue of ‘like products’ may surface.
• After all, a member state has to show that another member
state has instituted measures that renders its product being
treated less favourably compared to ‘like product’ in the
domestic market.
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The GATT : National treatment obligation
Japan – Alcoholic Beverages Case II (1996)
- The EC requested consultations on 21 June 1995. Later, Canada
and the US also requested consultations.
- The complainants claimed that spirits exported to Japan were
discriminated against under the Japanese liquor tax system. This
was because Japan levied a substantially lower tax on “shochu”
than on whisky, cognac and white spirits.
- Since shochu was a domestic product, higher taxes on whisky,
cognac, etc. would violate the national treatment obligation in Article
III – provided that these alcoholic beverages are ‘like products’.
- The Panel concluded that shochu and whisky, etc. were like
products. Hence, Japan had violated Article III.
- Japan appealed. The Appellate Body upheld the Panel’s decision.
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The GATT : National treatment obligation
But how should the ‘like products’ criteria be applied?
• Admittedly, there is considerable grey area where this issue is
concerned.
• In the Japan – Alcoholic Beverages Case II (1996), the Appellate
Body expressed the view that 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 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.
• In a nutshell, there is no one-size-fit-all interpretation. What
constitute ‘like products’ depend on the context and the specific
provision of the GATT. A case-by-case basis has to be adopted
each time. MONASH
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The GATT : Limits on quantitative restrictions
What are ‘quantitative restrictions’?
• These are quotas or absolute limits to trade that a country imposes
on the production or the importation/exportation of products (or
both).

Article XI curbs the imposition of quantitative restrictions.

Article XI
General Elimination of Quantitative Restrictions
1. No prohibitions or restrictions other than duties, taxes or other
charges, whether made effective through quotas, import or export
licences or other measures, shall be instituted or maintained by any
contracting party on the importation of any product of the territory of
any other contracting party or on the exportation or sale for export of
any product destined for the territory of any other contracting party. MONASH
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The GATT : Limits on quantitative restrictions
Are there exceptions to the requirement that member states
refrain from imposing quantitative restrictions?
• Yes. Article XI (2) lists several exceptions.
• For instance, a member state can impose export restrictions to
relieve critical shortages of foodstuffs or other products essential in
the country.
• A member state can also impose temporary quantitative restrictions
that diminish over time, e.g. as regards agricultural products.

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The GATT : Exemptions
The most favoured nation principle and the national treatment
obligation are not absolute. The GATT provides for exemptions.
• Two examples will be highlighted here.
• Article XX – General Exceptions allows a member state to depart
from these principles where such adoption would (among other
things) undermine public morals, affect the health and safety of the
population or exhaust its natural resources.
• Article XXI – Security Exceptions allows a member state to depart
from these principles where such adoption would undermine the
safety, or act against the protection of society, the population and
resources of that country. For instance, a member state can impose
restrictions on the export of ‘fissionable materials’ which are used to
construct nuclear weapons.

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The GATT : Exemptions
European Communities - Measures Affecting Asbestos and Asbestos-
Containing Products (2000) (EC – Asbestos Case)
- On 28 May 1998, Canada requested consultations with the EC in
respect of measures imposed by France in 1996.
- France banned the importation of asbestos and products containing
asbestos. However, certain domestic substitutes such as PVA,
cellulose and glass (“PCG”) fibres (and products containing such
substitutes) are still available in the domestic market.
- Canada argued that (among other things) France violated the
national treatment obligation in Article III.
- The Panel considered the products concerned to be ‘like products’.
- The Appellate Body came to the contrary conclusion. A competitive
relationships between the products was an important factor in
determining likeness in the context of Article. III. Here, Canada had
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failed to show that the products were competitive in order to BUSINESS
established the likeness among the products.
The GATT : Exemptions
- In any event, the Appellate Body concurred with the Panel that
France’s measure was necessary to ‘protects human life or health’
and that ‘no reasonably available alternative measure’ existed
(GATT Art. XX(b)).
- In conclusion, the ban on asbestos and products containing
asbestos was justified as an exception under Art. XX(b).

• Refer also to China – Measures related to the exportation of rare

earths, tungsten and molybdenum (DS431) discussed above.

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