Non-discrimination GATT Law

Non-discrimination is a cornerstone of GATT law

Introduction

The General Agreement on Tariffs and Trade is a treaty to which the U.S. and many other countries are signatories. Its purpose is to free international trade and reduce tariffs. GATT has been revised several times; each revision is called a “round”. The latest is the “Uruguay” Round of GATT requires signatories to protect intellectual property and provide similar protection of intellectual property owned by nationals and foreigners. Adherence by the U.S. to GATT has brought about numerous changes to the U.S. Patent System that brings U.S. patent law into closer harmony with the patent systems of other countries. (Oppedahl Patent Law Firm LLC, 1993).

The GATT established trade principles that continue to be applied today. The most important trade principle was non-discrimination with regard to the treatment of trade in goods among countries. Article 1 of the GATT, states that any advantage given by a contracting party to a product of another country, must be extended unconditionally to a like product of all other contracting parties. The above article is the most favoured nation principle. A second rule of non-discrimination is national treatment, the principle that imported and domestic goods should be treated equally. Although non-discrimination is a cornerstone of the GATT, some exceptions are allowed. For example, custom unions, free-trade areas, and special treatment for developing countries are permitted. (Fergusson, 2007).

Another principle is the open and fair application of any trade barriers. Tariffs were the most common and visible form of trade barrier at the time the GATT was established. (Fergusson, 2007). Tariffs are bound or set at maximum levels, and not to increase above the negotiated level. In general, quantitative restrictions such as quotas were not allowed, since tariffs were much easier to identify and to eventually reduce.

The paper will focus on the most favoured principles and the national treatment principles. Studies and researches will be presented to evaluate the cornerstone of GATT law which is non-discrimination.

Definition of Terms

GATT – General Agreement on Tariffs and Trade

Like Products or Likeness – having the same characteristics. The term applies to the products of different countries being exported and imported. The purpose of defining “Like Products” is to create a criterion by which likeness to be measured. One must described the individual criteria with some care, and after that it is possible to talk about degrees of likeness within the boundaries of those criteria or characteristics.

Discrimination – in economic, the definition is less favourable treatment of goods from one foreign country vis a vis the goods of another foreign country.

Brief History of GATT Law

After World War II a new order came in about trading. The Breton Woods Conference¹ in 1944, created the International Monetary Fund² nd the World Bank for economic restructuring and development in Western Europe. The General Agreement on Trade and Tariff was created at the first session of the Preparatory Committee of UN Conference on Trade and Employment in 1946. (Williams, 2006). The GATT’s initial purpose was to negotiate tariff concessions among members and to establish a code of conduct and procedures for the resolution of trade disputes by negotiation. Successive negotiations (called rounds) have also focussed on the code of conduct for no tariff barriers. The GATT was founded on the principles of non discrimination and multilateralism in international trade. Non discrimination is expressed via unconditional Most Favoured Nation status for all contracting parties. By this convention “if the tariff on imports from one country is decreased, the tariff on all imports of the same goods from other GATT members must be reduced.” (Williams, 2006).

The debacle of the 1930’s led to a reassessment, realignment and restructuring of the world economy. The result of the reassessment was that tariff wars were destructive to all parties, it should not be allowed to happen again and a more coherent framework was needed. (Williams, 2006). Conventional wisdom attributes much of the prosperity that occurred in the global economy since the

¹ officially known as the United Nations Monetary and Financial Conference was a gathering of delegates from 44 nations that met from July 1 to 22, 1944 in Bretton Woods, New Hampshire, to agree upon a series of new rules for the post-WWII international monetary system.

² oversee the world’s monetary and exchange rate systems

1940’s to the existence of the GATT. In particular, the GATT is lauded for the dramatic increase in world trade and (until the mid 1980’s) the absence of any serious trade friction. Beginning in 1986, the Uruguay Round negotiations included the areas of tariffs, services and intellectual property. Over seven years of negotiations, the GATT agreements evolved into their current state. The Uruguay Round concluded in 1994 with numerous agreements to reduce trade barriers and institute more enforceable world trade rules. One of the major results of the Uruguay Round was the creation of the World Trade Organization (WTO), which officially began operations on January 1, 1995. The WTO is a multilateral organization with the mandate to establish enforceable trade rules, to act as a dispute settlement body and to provide a forum for further negotiations into reducing trade barriers. According to the WTO website, there are 147 WTO member countries and observer countries. ³ Beginning in 2001 and proceeding through at least 2005, the Doha Agenda represents the current round of negotiations.

The Most Favoured Nation Treatment (MFN)

During the first years of International Trade, Most Favoured Nation status was usually used on a dual party, state to state basis. Generally bilateral, in the late 19th and early 20^th century unilateral most favoured nation clauses were imposed on Asian nations by the more powerful Western countries. One particular example of ‘most favoured nation’ status is the Treaty of Nanking as part of the series of unequal

³the complete list of members is available in the WTO website.

treaties. It was implemented in the aftermath of the First Opium War between Great Britain and China Qing Dynasty involving the Hong Kong islands.

Most favoured nation relationships contrast with reciprocal relationships, since in reciprocal relationships a particular privilege granted by one party only extends to other parties who reciprocate that privilege, rather than to all parties with which it has a most favoured nation agreement.

The Most Favoured Nation Treatment or National Trade Relation is an obligation to treat activities of a particular foreign country or its citizens at least as favourably as it treats the activities of any other country. MFN is the policy of non-discrimination in trade that provides to all trading partners the same customs and tariff treatment given to other favoured nations. The phrase most favoured maybe interpreted as especially favourable treatment but the concept of GATT is equal treatment to other party which is most favored. In the GATT the MFN obligation calls for each contracting party to grant to every other contracting party the most favourable treatment that it grants to any country with respect to imports and exports of products. (Abimbola, 2005).

Article 1 of the General Agreement on Tariffs and Trade states that “ with respect 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 other like product originating in or destined for the territories of all other contracting parties.” This clause speaks of MFN treatments fro “like products”. A 1982 GATT panel found in favour of Brazil that Spain had not lived up to GATT MFN obligation when it subdivided its customs classification of coffee and applied a much higher duty on those types of coffee imported from Brazil. The panel stated that the coffees were so nearly the same that they were “like products”, and that this must be treated non discriminatorily even though no tariffs were binding by Spain on the product.

GATT Article XIII stipulates that quantitative restrictions or tariff quotas on any product must be administered in a non-discriminatory fashion regarding like products, and that in administering import restrictions and tariff quotas, WTO Members shall aim to allocate shares close to that which might be expected in their absence. Article XIII provides for most-favoured-nation treatment in the administration of quantitative restrictions, and supplements the disciplines under Article I.

The MFN principle has been expanded and it includes not only importation and exportation of gods but it also includes foreign investments and trade in services. (Abimbola,2005). In Bilateral Investment Treaties⁴ (BIT) over 1800 BITs (Abimbola, 2005) were compared with about 500 only a decade ago. In the treaties

⁴ the aspect of foreign investments can be found in BIT.

each state generally undertakes to admit, in accordance with its laws and regulations, investments from other state. Also in the treaties are the Covered Investment, it guarantee not only national treatment, but also most favoured nation (MFN) treatment. The BIT also undertake to allow the investor the free transfer abroad of capital, profits and other sums that are related to the investment. It prohibits the expropriation of investments except in the public interest and against prompt, adequate and effective compensation. (Stevens, 2001).

Exceptions to the Most Favoured Nation Rule

There are some exceptions to the Most Favoured Nation rule, among them are as follows:

a) Regional Integration (GATT Article XXIV).

Regional integration liberalizes trade among countries within the region, while allowing trade barriers with countries outside the region. GATT Article XXIV provides that regional integration may be allowed as an exception to the Most Favoured Nation rule only if the following conditions are met. First, tariffs and other barriers to trade must be eliminated with respect to substantially all trade within the region. Second, the tariffs and other barriers to trade applied to outside countries must not be higher or more restrictive than they were prior to establishment of regional integration. Regional integration has a vast impact on the world economy today and is the subject of frequent debate in a variety of forums, including the WTO Committee on Regional Trade Agreements.

b) Generalized System of Preferences

The Generalized System of Preferences or “GSP” is a system that grants products originating in developing countries lower tariff rates than those normally enjoyed under Most Favoured Nation status as a special measure granted to developing countries in order to increase their export earnings and promote their development.

c) Non- Application of Multilateral Trade Agreements between Particular Member States (WTO Article XIII)

The Marrakesh Agreement Establishing the World Trade Organization provides that this Agreement and the Multilateral Trade Agreement in Annexes 1 and 2 shall not apply as between any Member and any other Member, when either of the following conditions are met: a) at the time the WTO went into force, Article XXXV of GATT 1947 had been invoked earlier and was effective as between original Members of the WTO which were contracting parties to GATT 1947. b) Between a Member and another Member which has acceded under Article XII only if the Member not consenting to the application has so notified the Ministerial Conference before the approval of the agreement on the terms of accession by the Ministerial Conference.
d) Other Exceptions

Other exceptions to the Most-Favoured-Nation principle include Article XXIV:3 regarding frontier traffic with adjacent countries, and Article I:2 regarding historical preferences which were in force at the signing of the GATT. General exceptions to the GATT that may be applied to the Most-Favoured-Nation principle include Article

XX regarding General Exceptions for measures necessary to protect public morals, life and health, etc., and Article XXI regarding Security Exceptions. It is also possible to obtain a waiver to constitute an exception to the Most-Favoured-Nation principle. Under WTO Article IX:3, countries may, with the agreement of other contracting parties, waive their obligations under the agreement.

National Treatment Principle

National treatment stands alongside MFN treatment as one of the central principles of the WTO Agreement. Under the national treatment rule, the members must not accord discriminatory appropriate treatment between imports and like domestic products. GATT Article III requires that WTO members provide national treatment to all other members. Article III:1 stipulates the general principle that members must not apply internal taxes or other internal charges, laws, regulations and requirements affecting imported or domestic products so as to afford protection to domestic production. In relation to internal taxes or other internal charges, Article III:2 stipulates that WTO standards shall not apply standards higher than those imposed on domestic products between imported goods and “like” domestic goods, or between imported goods and a directly competitive and substitutable product. With regards to article III:4 provides that member shall accord imported products treatment no less favourable than that accorded to “like products” of national origin.

National treatment is a principle in customary international law vital to many treaty regimes. In National treatment, if a particular right, benefit or privilege is granted by a state to its own citizen, then it must be also granted to the citizen of other states while they are in the country. It is stated in the international agreements that a state must provide equal treatment to those citizen of other states that are participating in the agreement.

Exceptions to National Treatment Rule

Although National Treatment is a basic principle, GATT still provides exceptions as follows:

• Government Procurement

GATT article III:8 a) permits governments to purchase domestic products preferentially, making government procurement one of the exceptions to the national treatment rule. This exception is permitted because WTO members recognize the role of government procurement in national policy.

While the GATT made government procurement an exception to the national treatment rule, the Agreement on Government Procurement resulting from the Uruguay Round mandates signatories to offer national treatment in their government procurement. The national treatment rule applies only between those who have acceded to the Agreement on Government Procurement, and for others, the traditional exception is still in force.

• Domestic Subsidies

GATT Article III:8 (b) allows for the payment of subsidies exclusively to domestic producers as an exception to the national treatment rule, under the condition that it is not in violation of other provisions in Article III and the Agreement on Subsidies and Countervailing measures. The reason for this exception is that subsidies are recognized to be an effective policy tool, and is recognized to be basically within the latitude of domestic policy authorities. However, because subsidies may have a negative effect on trade, the Agreement on Subsidies and Countervailing Measures imposes strict disciplines on the use of subsidies.

• GATT Articles XVIII:C

Members in the early stages of development can raise their standard of living by promoting the establishment of infant industries, but this may require government support and the goal may not be realistically attainable with measures that conform to the GATT. In such cases, countries can use the provisions of GATT Article XVIII:C to notify WTO members and initiate consultations. After the consultations are completed under certain restrictions, these countries are then allowed to take measures that are inconsistent with GATT provisions excluding Articles, I, II and XIII. The GATT article XVIII:C procedure allows both border measures and violations of the national treatment obligations in order to promote domestic infant industries.

• Other Exceptions to National Treatment

Exceptions peculiar to national treatment include the exception on screen quotas of cinematographic films under Article III:10 and Article IV. The provisions of GATT Article XX on general exceptions, Article XXI on security exceptions and WTO Article IX on waivers also apply to the national treatment rule.

Problems on Trade Policies and Measures

National treatment as well as MFN is invoked in WTO disputes. National treatment principle is usually invoked in conjunction with other provisions regarding MFN, quantitative restrictions, TRIMs and standards and conformity assessment. Among the countries that are having problems in trades are the United States, Korea, Indonesia and Brazil.

Conclusion

Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.
Most-favoured-nation (MFN) treatment. It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), although in each agreement the principle is handled slightly differently. Together, those three agreements cover all three main areas of trade handled by the WTO (World Trade Organization).
Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group — discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.
2. National treatment: Treating foreigners and locals equally. Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle of “national treatment” (giving others the same treatment as one’s own nationals) is also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS), although once again the principle is handled slightly differently in each of these.
National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.

While this is generally viewed as a desirable principle, in custom it conversely means that a state can deprive foreigners of anything of which it deprives its own citizens. An opposing principle calls for an international minimum standard of justice (a sort of basic due process) that would provide a base floor for the protection of rights and of access to judicial process. The conflict between national treatment and minimum standards has mainly played out between industrialized and developing nations, in the context of expropriations. Many developing nations, having the power to take control over the property of their own citizens, wished to exercise it over the property of aliens as well.

Though support for national treatment was expressed in several controversial (and legally nonbinding) United Nations General Assembly resolutions, the issue of expropriations is almost universally handled through treaties with other states and contracts with private entities, rather than through reliance upon international custom.

National treatment is an integral part of many World Trade Organization agreements.

Reference:

Abimbola, FO., 2005, The Most Favoured Nation Principle http://primesolicitors.com/papers/website_resource_3.pdf?PHPSESSID=0fb5d787e50d5e25a3253641c6fe4405

http://www.wto.org/english/docs_e/legal_e/legal_e.htm#GATT94

Fergusson, I. May 2007 CRS Report for Congress- The World Trade Organization:

Williams, M. A, 2006 Brief History of GATT and NAFTA Women’s Alternative Economic Network, http://www.greens.org/s-r/06/06-15.html

The Bretton Woods Conference, 1944 http://www.state.gov/r/pa/ho/time/wwii/98681.htm

http://www.law.duke.edu/lib/researchguides/gatt.html

http://www.worldtradelaw.net/articles/hudeclikeproduct.pdf

http://www.law.columbia.edu/library/Research_Guides/internat_law/trade_guide#general_intro

Stevens, M., September, 2001, Experience in Arbitrations under the ICSID Rules pursuant to Bilateral Investment Treaties, Vol. 29, No. 8 Page 377.

Chapter 2 : National Treatment Principle http://www.meti.go.jp/english/report/downloadfiles/gCT0002e.pdf