This article is written by Sparsh Mali, a fourth-year law student at the School of Law, UPES, Dehradun. The article explains about the two Non-Discriminations Principles of WTO and brief about the application of MFN & National Treatment principles.
Non-discrimination is a fundamental principle of the World Trade Organization (WTO) and is embodied in the:
- Most Favoured Nation Treatment; and,
- National Treatment.
We can see different multilateral rules and principles which were set up in 1947 to govern International trade relating to goods between member nations of GATT, 1947. After the great development in the Uruguay Round which leads the Marrakesh Agreement and established the World Trade Organisation on 1 January 1995, the basic principle of non-discrimination principle formed in 1947 is consistently same to the latest organisation between member nations. The only things which are amended in these principles were the scope otherwise the objective of these principles is the same as of framed in 1947.
Article I and Article III of the GATT 1994, deals with Most Favoured Nation Principle and National Treatment Principle respectively. With further development in the scope of these principles, now these principles not only deal with the trade in goods practices rather now they also govern the trade in services and trade in IPR.
The MFN Principle
A most-favoured-nation (MFN) principle explains the concept where a country has to grant some privileges related in a trade agreement to any of the member nations of the World Trade Organization. The concept not only ends here, but the main principle of the MFN principle is also that if any privileges are granted to any member nation by another member nation of the WTO then the same privilege of like products has to be given to all the other member nations of the WTO. The main objective of these principles is to promote trade and provide equal opportunity to get the best benefits of any member nation’s resources.
Illustration- If India grants special treatment to Germany, that goods imported especially related to motor vehicle industry from Germany to India will have no import duty of trade tariff and in the manner, Germany excludes India from trade tariffs and import duty about thee the goods imported to Germany from India. Then according to the MFN principles, both Germany & India are violating the MFN principles of GATT, 1994 and both the country has to avail the same benefit or privilege to all the member nations of the GATT 1994. Which means India should privilege every member nation in excluding trade tariff of goods related to motor vehicles and the same privileges have to be granted by Germany to all the other member nations of GATT 1994.
Article I:1 of the GATT, 1994 (MFN PRINCIPLE)- 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.
Interpretation of ArticleI:1 of the GATT 1994 (MFN Principle)
Rationale Behind The MFN Principle. The MFN principle works to:
- Maximize efficiency.
- Minimize transaction costs.
- Promote further reciprocal liberalization- This benefits particularly small developing countries, which benefit from the most favoured treatment provided to other Members.
- Minimize the costs of trade negotiations.
Scope of Application of the MFN Rule: De Jure& De Facto DISCRIMINATION
The MFN principle of GATT has interpreted that a measure may be discriminatory not only in law (de jure) but also in fact (de facto). De jure means when the extra advantage or benefit is given to any of the nation or member nation which can be recognised by the legal value or through legal instruments and that too without extending such advantage of like products to all WTO Members. When the discrimination cannot be recognised directly through words or face of the legal instrument, then it can still be de facto, and discriminatory. De facto discrimination occurs when there can or cannot be an issue of a legal instrument but the discrimination can be found in the material facts. To establish de facto discrimination, all the facts relating to the application of the measure must be reviewed.
Illustration- If India a WTO Member, frame a policy which has different tax policies like a bike which are manufactured automatically or through robotic plants will be taxed 10% of their marketing value and on the other end the bikes which are manufactured manually or through manpower will attract 7% tax of their marketing value. In this scenario, the countries which use capital-intensive techniques for manufacturing bike will have an advantage of 3% compared to those countries which utilise capital intensive techniques. Therefore in this case both the tax slabs has different perspective for taxing the bikes and the discrimination cannot be found through de jure aspect as both the manufacturing are of different nature but the discrimination can be recognised capital-intensive concept of de jure and it can be easily understood that the discrimination is recognised by considering facts of the case and not only by the considering legal aspects.
The MFN Principle: Three-Tier Test or The Essentials Considering MFN principles-
One needs to check these three elements to find an inconsistency with MFN principles:
- Any advantage or favour or privilege or immunity covered by Article I:1 of the GATT 1994; and
- Like products; and,
- The advantage issued to a specific nation is not granted immediately and unconditionally to the like products of every member nation.
Article I:1 covers a broad range of measures in relation to exportation and importation as well as internal measures. Such measures include the following:
- Customs duties;
- Any kind of charges imposed on importation or exportation;
- Any kind of charges imposed in connection with importation or exportation;
- Any charges imposed on the international transfer of payments for imports and exports;
- The method of levying such duties and charges;
- All rules and formalities in connection with importation and exportation;
- Internal taxes or other internal charges (covered in Article III.2);
- All laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of any product (covered in Article III.4).
The concept was coined and explained by the Appellate Body in EC – Bananas III, which explains that “like products” should be treated equally, irrespective of their origin. Which means that products which are not “like products” does not come under the restrictive principle of MFN and may be treated differently.
With the development in GATT/WTO the different cases have set up four criteria or essential under Article I:1, which are to be fulfilled to determining whether the imported and domestic products are “like products“, those are:
- The product’s end uses.
- Consumers’ tastes and habits.
- The product’s nature, properties and quality (physical characteristics).
- The customs classification of the products.
Understanding the Three Tier Test of MFN Principles.
Analysis of “Like Products” under Article I:1 of GATT 1994.
The concept of “like products” has been interpreted by GATT in the Spanish Coffee case, where the GATT Panel concluded that various types of unroasted coffee cannot be classified differently and comes under the same category which makes all the type of coffee a like product. The Panel applied the test of recognising ‘Like Products’ and categorised all the types of unroasted coffees as like product. When the panel recognised it as a like product, the panel explained that there could be no chances of imposing tariff differently as all the types of coffee are Like Product. The Panel also examined the matter that being unroasted coffee ‘beans’ of different physical characteristics but the blends of that coffee are its end-use, and it is universally seen that the end product which is blend can only be used for the purpose of drinking. The Panel in its conclusion noted that no different tariff policy can be adopted as the different types of coffee come under the ambit of Article I: 1 of GATT which is ‘Like Product’.
Analysis of ‘The advantage issued to a specific nation, is not granted immediately and unconditionally to the like products of every member nation’.
The third test in the three-tier test is the granting of the advantage “immediately and unconditionally to all other member nations”. This means that once a WTO Member has granted an advantage or any privilege to imports from any country, then that WTO member must immediately and unconditionally grant that advantage to all the other member nations with respect to imports of all the like products from all WTO Members.
In Indonesia – Autos case, the main issue was that Indonesia has framed a few policies which classified the tariff rate of manufacturing automobile. In this case, the Panel held that according to MFN principle the right of Members cannot be made conditional on any criteria and making such conditional policy violates the principle laid down in the provisions of Article I:1 of GATT 1994.
Exceptions of GATT 1994 Principles
Unlike any other law GATT 1994 also has some exceptions and a number of exceptions specifically provided in various provisions of GATT/ WTO which allow WTO Members not to follow every provision laid down under GATT/ WTO, including the MFN & National Treatment principles. Some of the of GATT/ WTO which powers any member nations not to be consistent with GATT/ WTO rules are General Exceptions explained under Article XX, Security Exceptions explained under Article XXI, Balance of Payment & Temporary Quantitative Restrictions explained under Article XII, XVIII(B), XIV, General Exception of Waivers explained under Article IX(3) apart from these there are other provisions also which deals with exceptions related to special and differential treatment.
Exceptions of MFN Principles
As we discussed above that there are various provision dealing with the GATT/ WTO agreement exceptions, as like them, MFN principles also have their own exceptions which are importantly classified under two categories i.e., Regional Integrations (It is a process in which neighbouring nations come into an agreement to integrate their cooperation through common rules) and Enabling Clause(It means certain trade preference for developing and least developing nations), other than two exceptions discussed above there are few more exceptions of MFN principles which are:
- Historical Preferences (Article I:2 GATT 1994)- We can easily understand with the words when the trading nations are favouring any trade preference to any nations from many years then such trade benefits doesn’t come under the trade preference restriction of MFN principles and hence becomes an exception to MFN principles.
- Frontier Traffic (Article XXIV:3 GATT 1994)- Frontier Traffic means certain trade advantages to adjacent or neighbouring countries/ nations. Unlike historical preferences, the economic impact of this exception is very limited.
Illustration– MFN Principle For Goods
CASE- Let us assume that India, Canada and Thailand are WTO Members. Where India is a developed nation and classifies all the beverages under the same tariff of 10% of their manufacturing/ production cost. With the change in the internal government of India, the new India government framed new policies and rules related to import and sale of all the beverages. The new government classified beverages as per the level of preservative (all types of natural preservatives) added in it. According to present policies India framed different customs duties/ import duties to beverages drink: A 10% import duty proportionate on beverages with a level of preservatives below 15% and 12 % import duty proportionate on beverages with a level of preservatives above 15%.
India applies new import duties all countries, except to Thailand, and charged only 5% import duty proportionate on beverages with a level of preservatives 15%; and 7% import duty proportionate on beverages with a level of preservatives above 15%.
India is not capable or efficient in producing the best quality beverages for their people and due to such reasons, it imports all such products from many WTO Members. However, the beverages are imported from both the country Canada and Thailand. Canada believes that India’s new laws and policies violate the MFN principle.
According to the MFN Principles Canada, may complain and argue on the following basis:
- The MFN Principle- According to the MFN principle India has to give immediately and unconditionally, all the advantages that it has to Thailand. As the act of India violates the MFN principle and according to the three-tier test of MFN, India has discriminated against other nations as India didn’t follow Article I:1 of GATT 1994.
- Like Products- India may argue that beverages with different levels of preservatives are not ”like products” but within Article I:1 with the same physical characteristics, end-uses, these beverages are assumed by consumers as like products.
- De Facto & De Jure Discrimination- India might claim there is no discrimination between like products, but instead applies to different categories of products. But according to the essentials of Like Products, it can be easily assumed that the beverages with different categories cover both de jure & de facto discrimination, hence India is liable for such discriminations to other member nations.
- Exception- India can only argue upon raising other points regarding the preferential treatment provided under the GATT exception justified by Article XXIV, which enables GATT/ WTO Members to set apart from the MFN principle and form customs unions and free trade areas subject to certain conditions.
The National Treatment Principle
The NTP prohibits any of the member nations from favouring or giving any advantages or raising any benefits to their domestic products/ goods over imported products of other member nations. Article III of GATT 1994 specifically deals with NTP and explains the secondary need of NTP after MFN principles to fight against any discrimination of imported products. NTP has been well defined under paragraph 1, 2 & 4 of Article III and 2nd sentence of Article III. NTP deals with the products of any member imported by any other member shall not be treated less favourable than that to like products of national or domestic product in respect of all laws, regulations, requirements affecting their internal sale etc., which means the domestic country should not make any rules or law which protects its domestic products over imported products. So reading NTP with MFN gives a brief difference between both of the principles that one deals with protectionism and MFN deals with favourable treatment to all nations.
Reasons Behind NTP
The main reason why GATT/ WTO drafter has proposed NTP was after imposing so much restriction with regard to MFN principles, the drafter considered that the member nation can discriminate the imported product indirectly and to prevent such indirect acts of member nations NTP was introduced to prevent and restrict the domestic government from imposing any internal regulation that may create scope for discrimination to imported products over domestic product.
Illustration- Let’s assume that India is manufacturing a certain mobile phone for Rs. 10k and on the other hand China is manufacturing a certain mobile phone with the same configurations and quality for just Rs.7k. In that case, being both the countries a member nation of GATT/ WTO, India can’t impose any restrictions on exporting Chinese Mobile phones from China to India, but India may impose certain heavy taxes to protect its domestic market. To protect such measures the drafter of GATT/ WTO introduced NTP which prohibit any member nation from doing such activities.
Now it can be assumed that the main purpose of Article III of the GATT 1994 was to prohibit or limit the use of trade-restricting by requiring non-discriminatory treatment between imported and domestic goods.
For better understanding, we may classify NTP into 3 different categories:
- To avoid protectionism measure by the domestic country.
- To maintain equality between imported and domestic products.
- To protect the imported products from unjust tariffs.
Scope of NTP
Just like the MFN principle, the scope of the NTP also covers the scope of de jure and de facto discrimination of imported products. A stance is de jure discriminatory when discrimination can clearly be seen between imported and domestic like products in term of a legal manner. And when the discrimination is very much clear on the face of a legal instrument that it doesn’t have any complexity to understand, then it can be de facto discrimination. The most important part of NTP is that it only applies to internal measures, and it does not at the border on imported goods.
Illustration- Let’s assume a case when India imposes a 10% tariff on importing automatic machines and but on the other hand India only imposes 7% tariff on Indian manufacturer of automatic machines. Then it can be clearly seen that India is discriminating against imported products and protecting its domestic products. And any tariffs imposed on imported products collected at the time of importation in the country are not considered as against the NTP, as Article III only deals with internal taxes which are discriminating against imported products over domestic products.
In Argentina – Hides and Leather, the Panel expressed that VAT of Argentina was an internal measure or internal tax and comes under Article III:2 of WTO.
Interpretation of Article III
Article III:1 General Obligation- It talks about the general obligation of Article III and lays tells about the concept of NTP that how it works and what the essentials of it.
Article III:2 Internal Taxation- It tells about the non- discriminatory principle through internal taxation.
- Article III:2 – First Sentence (Two-Tier Test)
This part of Article III gives a platform for testing if the action of importing nation is discriminatory, for testing such action a two-tier test has to be passed to check the consistency of importing nation with NTP which are:
- If the imported and domestic products are like products- It explains the consistency of ‘Like Product’ essentials with domestic & imported products. And explains a condition if both domestic and imported products are ‘Like Product.
- If the imported products are taxed in excess of the domestic products.- It explains the condition when the imported products are taxed excessively compared to like domestic products.
Here in the NTP the definition and essentials of ‘Like Products’ are the same as discussed in MFN principles.
- Article III:2 – Second Sentence
It has another test of checking if the action of importing country is against NTP or not. Therefore, if there is no violation of Article III:2, first sentence, and if can still be considered that there is an infringement of Article III:2, then another three-tier test of the second sentence can be applied.
Three – Tier test prescribed under Article III:2 of 2nd sentences:
- If the imported and domestic products are directly competitive or substitutive- This means if domestic and imported products are directly or closely competitive or substitutive like tea- coffee, roasted- unroasted coffee etc.
- If the domestic and imported products are not similarly taxed or if the imported products are taxed excessively over domestic product- This means if the importing country is imposing more taxes on imported products and less tax on domestic products.
- If the importing nation is doing anything which causes protectionism of their domestic products over imported products- This means a condition when the domestic government is trying to protect their domestic product by implementing certain rules and regulations in any manner.
- Article III:4 (Internal Laws, Regulations and Requirements Related to Internal Sale, Transportation, Distribution or Use)- This article is again providing another platform to test if the importing country is violating any NTP and if such violation can’t be tested by either of the two tests explained above then, the test expressed in this article can help to test if any nation is violating NTP. The test follows three conditions which are:
- The imported and domestic products at issue are like products.
- The measure at issue is a law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution, or use- It means that if the importing country is using any of such measures to protect its domestic products by using its intern power of imposing new rules and regulations etc.
- The imported products are afforded less favourable treatment than domestic products- It is a condition when the government is trying to market its domestic product and doing unfavourable practices in providing less favourable treatment to imported goods.
Exception to NTP
Just like the exception to the MFN principles NTP also has various exceptions which provide the nation from following the NTP blindly and grants any of the nations the power to refuse on implementing such principles on their trade. Some specific exceptions which deal with the national treatment principle can be summarized as follows:
- Government Procurement (Article III:8A)- It explains a concept or principle that when government agencies hire or purchase any imported goods for their benefit or for government purpose, then the domestic government can give preference to domestic products over imported products, it is also considered that the purpose of government procurement should only be subjected to government use and not for commercial utility.
- Subsidies to Domestic Producers (Article III:8B)- Governments have the power and can provide subsidies even including subsidies to domestic manufacturers for aiding those manufacturers from a tax benefit and can impose some restrictions on the kind of trade or business they can carry for the purpose of exempting from tax. And such subsidies granted by domestic government are not considered necessarily be legal by GATT/ WTO members. And also in the Tokyo and Uruguay Rounds, a provision for the additional subsidy was introduced and now Subsidies and Countervailing Measures are dealt with SCM Agreement.
- Internal Maximum Price Control Measures (Article III:9)
- Cinematograph Films (Articles III:10 and IV of the GATT 1994)- A wide concept of discrimination between international and nation fils are discussed under this article which says that the possibility of giving preferences to products emerging from the national movie industry can be granted and it will not be covered under NTP. National preferences are governed by the provisions of Article IV, and the domestic country can impose internal quantitative regulations in “screen quotas”.
Illustration- National Treatment For Goods
Scenario- Let us assume that India and Canada are WTO Members. Recently, India has come up with new regulation which imposes a tax of 20 % on cars with fuel efficiency below 14 Km/L and a sales tax of 7% on cars with fuel above 14 Km/L.
Cars with fuel efficiency below 14 Km/L are also restricted to advertising their product. Canada is the leading car exporter to India. All cars manufactured in Canada are with fuel efficiency below 14 Km/L. India is the major producer of cars with fuel efficiency above 14 Km/L. Canada believes that India’s regulation violates the national treatment principle under the WTO.
- Canada’s argument could be as follows: With the application of the 1st principle which is MFN principles, does not have any much relevance according to the case and also that the MFN principles don’t cover the case issues. So here NTP will be introduced and their application will definitely make some relevance in solving the issues of the illustration.
The NTP prohibits any of the member nations from favouring or giving any advantages or raising any benefits to their domestic products/ goods over imported products of other member nations.
- Internal Taxation – Article III:2 with respect to the sales tax, Canada can invoke Article III:2, which covers internal taxation. Canada can argue that the action by the Indian government can be easily be seen that it is de facto discriminatory. Where de facto discrimination relates to awarding protection to domestic products by imposing such different tax and it is very much visible that both the cars- India & Canada Originated are completely like products and hence any discrimination in like products satisfies the need of NTP. Therefore, India is liable for doing prohibited acts under agreements of GATT/ WTO.
- Two–tier test under Article III:2 first sentence
- The domestic cars/ Indian cars with fuel efficiency equal or above 14 Km/L and imported cars with fuel efficiency below 14 Km/L are “like” products; and
- The imported cars are taxed in excess of domestic cars with respect to fuel efficiency and classified the same products in different stages. To prove ‘Like Product’ Canada might argue that cars have the same end-uses, same physical characteristics, and the end user has the only possibility.
- Three –tier test under Article III:2, second sentence- If Canada fails to prove the fact that different classification of cars with respect to fuel mileage is also ‘Like Product’ as per the provisions of Article III: 2- first sentence. Canada still has a chance to approach the Panel/ Dispute Resolution Body under the same provision by the second sentence and argue that both the products are “directly competitive or substitutable” products (which are also considered as ”like” products). If Canada challenges India, then it would have to establish a three-tier test of the second sentence that:
- Imported and domestic cars with different fuel efficiency are directly competitive or substitutable products;
- The domestic and imported are discriminated in terms of imposing difference taxes or the imported cars are taxed higher than the domestic cars;
- The different tax policy adopted by the Indian government has some effects, and such effects end up awarding protection to domestic products/ cars.
- Advertising ban – Article III:4, with respect to the ban on advertising, Canada can apply principles of Article III:4, and the three-tier test of this article covers the aspects of the internal regulation. To substantiate the arguments Canada has to make consistency with the actions of the Indian government and the principles of the article which are-
1) The measures adopted by the Indian government by imposing different or new laws, regulations, or any such actions which affect the internal sale of the imported products/ cars;
2) Canada has to prove that both imported and domestic products are “like products” as discussed above; and
3) That Indian is treating less favourable to imported products as compared to domestic products. Canada can uphold its previous arguments that because of cause in internal policies which cause a ban on advertisement, and such actions affect the sale of cars in India. Therefore, Indian is treating less favourably to imported products/ cars than their domestic cars as the ban on advertising is only subjected to imported cars.
Indo- Pak MFN Case Study
Indian being a vast economy with cheap labour facility and Pakistan a country of very cheap labour, where hiring labour is way too cheap than any other developed nations, and because of such reasons both India and Pakistan have great trade potentials. With respect to it, India has given MFN status to Pakistan much early which was just after the establishment of WTO i.e., 1996. But the main problem is Pakistan didn’t give the same status to India although Pakistan has initiated many debates still Pakistan is incapable of granting MFN status to India.
Pakistan explained two reasons why it didn’t give MFN status to India which were-
- Since Pakistan has a trade deficit with India, granting MFN status to India may increase trade deficit to higher levels as India is a net exporter country to Pakistan.
- Since India & Pakistan has never shared friendly relations with each other and granting such status to India may bring internal political threat/ risk.
Pakistan has to consider new concept which is almost equal to MFN status that is Non- Discriminatory Market Access, but as Pakistan did earlier, it recalled the same action first Islamabad promised to India in giving NDMA status and again Pakistan left taking no execution on their promise. But it was the first time when India has taken strict action against Pakistan and has withdrawn the MFN status given to Pakistan in 1996 after the Pulwama terrorist attack who was responsible for 40 innocent killings of Indian Soldiers and such withdrawal actually means withdrawing lower import duties. Hence, the present condition grants power to India that it can increase the tariff rates on imports to any extent from Pakistan. In respect of excising the new powers, the government has increased tariff rates to 200%.