WTO Non-Discrimination Principles

• This guide presents quiz questions and answers on WTO non-discrimination principles, covering MFN and National Treatment obligations under GATT 1994 and GATS.
• It also discusses tests for "like products" and "like services," "less favorable treatment," de jure vs. de facto discrimination, and key case examples.

Most-Favoured-Nation (MFN) Treatment

• MFN requires a WTO member to extend any trade advantage given to one member's like products to all other WTO members.
• GATT Article I:1 states that any advantage granted to a product of one country "shall be accorded immediately and unconditionally" to the like product of all other WTO members.
• In Canada – Autos, a duty exemption extended only to certain countries violated Article I.
• GATS Article II:1 requires each member to accord "immediately and unconditionally" to services and service suppliers of any other member treatment no less favorable than that accorded to like services/suppliers of any country.
• MFN ensures non-discrimination between foreign countries in both goods and services trade.
• WTO law recognizes MFN violations in cases of both de jure (explicit) and de facto (implicit) discrimination.
• De jure discrimination favors imports from certain countries over others on its face.
• An example is the EU’s tariff preference scheme that gave certain developing countries better rates than others, found de jure inconsistent with Article I:1 GATT.
• De facto discrimination occurs when a rule is origin-neutral in wording but in effect benefits imports from some countries over others.
• In EC – Bananas III, EU's rules for banana import licensing favored operators from ACP countries, resulting in an MFN violation under GATS Article II.
• In Belgian Family Allowances, an origin-neutral import tax exemption was conditioned on foreign countries having certain policies, violating MFN as a de facto discrimination.
• Article I:1 GATT and Article II:1 GATS cover any form of unequal treatment among like products/services of different foreign origins, whether overt or resulting from the measure’s design/impact.

National Treatment (NT)

• The National Treatment (NT) principle requires that imported products (or services) be treated “no less favourably” than like domestic products in terms of internal taxes and regulations.
• Under GATT Article III, once a product has entered the domestic market, it should not be subject to higher internal taxes nor discriminatory regulatory treatment compared to a domestic like product.
• Article III:2 states that imports shall not be taxed “in excess of” like domestic products.
• Article III:4 requires that laws and regulations accord imports treatment “no less favourable” than that for like domestics.
• The goal of Article III:1 is to avoid measures applied "so as to afford protection" to domestic production.
• Under GATS Article XVII, the NT obligation requires each member to accord foreign services and service suppliers treatment no less favorable than it gives to its own like services and suppliers, in sectors where commitments have been made.
• NT forbids a country from using internal taxes or rules to favor its domestic products or services over foreign competitors.
• NT does not demand perfectly identical treatment in form; a government can have different formal measures for imports vs. domestics as long as in effect they are equitably treated.
• Article III:2 of GATT contains two related national treatment obligations on internal taxation.
• Under Article III:2, first sentence, a WTO member must ensure imported and domestic “like products” are taxed identically.
• The second sentence (interpreted with Ad Article III:2) extends protection to cases where products are not perfectly "like" but are "directly competitive or substitutable."
• In Japan – Alcoholic Beverages, Japan’s higher tax rate on vodka (and Western spirits) than on shochu violated Article III:2 second sentence.
• Article III:2 ensures no higher taxes on strictly like imports (first sentence) and guards against protective taxation on similar/comparable imports even if not identical (second sentence).
• Under the GATS, National Treatment is a qualified obligation tied to each member’s specific commitments.
• Article XVII GATS requires that in any service sector a country has included in its schedule of commitments, foreign services and service suppliers must be given treatment no less favorable than the member’s own like services and suppliers.
• NT in GATS is not automatic across all sectors, it applies only in sectors that a member has committed to open.
• GATS explicitly covers measures affecting “services and service suppliers” and allows that NT can be achieved through either identical or formally different treatment.
• In Argentina – Financial Services, the panel examined whether Argentina’s measures accorded less favorable treatment to foreign financial service suppliers versus like domestic service suppliers where Argentina had commitments in financial services.

“Like Products” & “Like Services”

• “Like products” are products in such a close competitive relationship that they can be considered similar for the purposes of applying WTO non-discrimination rules.
• WTO panels and the Appellate Body use these criteria to determine likeness:
  • Physical properties or characteristics
  • End-uses
  • Consumer tastes and habits
  • Tariff classification
• These criteria originated from the 1970 Border Tax Adjustments Working Party report.
• In Philippines – Distilled Spirits and Japan – Alcoholic Beverages, panels used these factors to assess if different alcoholic beverages were “like” or at least directly competitive.
• No single factor is decisive and they are examined collectively to judge the competitive substitutability of the products.
• A stricter likeness test is applied in tax cases under GATT Article III:2 first sentence, whereas a somewhat broader notion is used under Article III:2 second sentence and Article III:4.
• A difference in origin alone is not a legitimate basis to deny likeness, If two products are identical or very close except for origin, they are considered like.
• There is a rebuttable presumption that products are like if a measure discriminates solely on origin.
• “Like products” means products essentially the same in competitive terms, assessed by the above criteria.
• In services trade, the concept of “like services and service suppliers” serves a similar role as “like products” does in goods.
• GATS Article II:1 and Article XVII:1 both use the term “like services and service suppliers”.
• WTO jurisprudence indicates that the primary criterion is the competitive relationship between services/service suppliers.
• If two services compete for the same consumers and meet the same needs, they are likely "like" or at least directly competitive.
• The Appellate Body emphasized that services are “like” if they are in a competitive relationship in the market in Argentina – Financial Services.
• There is a "presumption of likeness" when a measure’s only distinction is the origin of the service or service supplier.
• Factors can include the nature and quality of the service, the consumer’s purposes and preferences, and regulatory classifications.
• “Like services” are services that compete closely, and “like service suppliers” are those providing closely substitutable services, as judged by their competitive context.

“Less Favourable Treatment” & Discrimination

• Less favorable treatment is understood as a measure that adversely affects the competitive opportunities for imported goods (or foreign services) compared to domestic like products (or services).
• The presence of “less favourable treatment” is determined by analyzing whether the measure alters the conditions of competition in the relevant market to the disadvantage of the imported products.
• No proof of protectionist intent is required and WTO panels focus on the objective impact.
• In Korea – Beef, Korea’s rule that imported beef had to be sold in separate stores from domestic beef was found to modify competitive conditions against imports.
• A formal difference in treatment is neither necessary nor sufficient; what matters is that the different treatment “modify the conditions of competition to the detriment of imports.”
• "Less favourable treatment" is proven by demonstrating an import-disadvantaging impact on competition, not necessarily an explicit bias or intent.
• De jure discrimination refers to a measure that openly discriminates based on origin on its face, while de facto discrimination refers to a measure that is origin-neutral in wording but in practice disproportionately disadvantages imports.
• WTO law prohibits both types under the non-discrimination obligations of GATT and GATS.
• An example of de jure discrimination is the measure in Canada – Autos where Canada’s regulation granted duty-free import privileges only to automobiles from certain countries.
• For de facto discrimination, a classic example is Japan – Alcoholic Beverages II, since Japan’s liquor tax law did not explicitly distinguish national origin, but the effect was that most domestic beverages fell into low-tax categories while imported beverages fell into high-tax categories.
• Another example is EC – Bananas III where the EU’s licensing rules for banana distributors didn’t explicitly single out foreign companies, but they were structured in a way that benefited EC-owned firms and harmed Latin American and U.S. firms.
• Even if a rule appears origin-neutral, if its impact is discriminatory, it breaches WTO non-discrimination rules.
• In US – Gasoline, a U.S. Clean Air Act rule treated imported gasoline less favorably than domestic gasoline by imposing different baseline quality standards.
• The WTO Panel and Appellate Body found that this regulation violated GATT Article III:4 (National Treatment) because it modified the conditions of competition in the U.S. market to the detriment of imported gasoline.
• In EC – Asbestos, the Appellate Body broke new ground by considering health risk as a factor in “like product” analysis under GATT Article III:4.
• The Appellate Body concluded that asbestos-containing construction materials and functionally similar materials that used non-asbestos fibers were not “like” each other, owing to the serious health hazard posed by asbestos.
• In Argentina – Financial Services the Appellate Body underscored that under GATS, determining “likeness” hinges on the competitive relationship of the services/suppliers in question.
• The AB introduced the idea of a “presumption of likeness” when a measure’s distinction is solely based on origin of the service/supplier
• The Appellate Body in Argentina – Financial Services also opined on the standard for less favourable treatment under GATS, confirming that the core question is whether the measure modifies conditions of competition to the detriment of foreign services or service suppliers.