This document discusses the principle of national treatment under international trade law. Some key points: - National treatment means imported goods should receive no less favorable treatment than domestic goods once they enter the market. It is a central WTO principle to eliminate non-tariff barriers. - The document examines national treatment provisions in GATT, GATS, and TRIPS. It also discusses exceptions for government procurement and domestic subsidies. - Two case summaries are provided. In Japan - Alcoholic Beverages, a Japanese tax scheme was found to violate national treatment by taxing imported vodka higher than domestic shochu. In Korea - Alcoholic Beverages, Korea's tax regime also violated national treatment by imposing lower taxes on

1. National Treatment - Principle of
Non – Discrimination
Subject – International Trade Law
Semester VIII

2. - National treatment (GATT Article III) stands alongside MFN treatment as one of
the central principles of the WTO Agreement.
- Under the national treatment rule, Members must not accord discriminatory
treatment between imports and “like” domestic products (with the exception
of the imposition of tariffs, which is a border measure).
- This rule prevents countries from taking discriminatory measures on imports
and from offsetting the effects of tariffs through non-tariff measures.
- The purpose of the national treatment rule is to eliminate “hidden” domestic
barriers to trade by WTO Members by according imported products treatment
no less favourable than that accorded to products of national origin.
- Adherence to this principle is important in order to maintain a balance of rights
and obligations, and is essential for the maintenance of the multilateral trading
system
- The concept of national treatment can be found in Article 3 of the General
Agreement on Tariffs and Trade (GATT), Article 17 of the General Agreement
on Trade in Services (GATS), and Article 3 of the Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPS)

3. - National treatment is a concept of international law that declares if a state provides
certain rights and privileges to its own citizens, it also should provide equivalent rights
and privileges to foreigners who are currently in the country.
- National treatment is the principle of giving others the same treatment as one’s own
nationals
- National treatment applies to imported goods once they enter the market (they
should be treated the same as locally-produced goods), foreign and domestic
services, and to foreign and local trademarks, copyrights, and patents
- The concept of national treatment can be found in bilateral treaties, as well as in most
World Trade Organization agreements.
- When goods are imported under an international agreement, they must be treated the
same as goods produced locally, although this obligation does not take effect until the
imported goods have entered the foreign market
Ex: if Country A provides special tax breaks for its fledgling pharmaceutical industry, all
pharmaceutical companies that have operations in Country A will be entitled to the tax
breaks, regardless of whether the company is domestic or foreign.

4. - The “national treatment” clause in trade agreements was designed to ensure
that internal fiscal or administrative regulations would not
introduce discrimination of a nontariff nature.
- It forbids discriminatory use of the following:
i. taxes or other internal levies
ii. laws, regulations, and decrees affecting the sale, offer for sale, purchase,
transport, distribution, or use of products on the domestic market
iii. valuation of products for purposes of assessment of duty
iv. legislation on prices of imported goods
v. warehousing and transit regulations
vi. the organization and operation of state trading corporations.

5. Article III, GATT - National Treatment on Internal Taxation and Regulation
1. All laws relating to internal taxes, internal charges, laws of internal sale,
purchase, transportation, distribution or use of products, internal quantitative
regulations, 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. No imported products of contracting parties shall be subject, directly or
indirectly, to internal taxes, internal charges of any kind in excess of those
applied, directly or indirectly, to like domestic products.
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 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 (parties
levying tax can do so on imports if import duty is charged as per agreement on
varying proportions of imports)

6. 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.
6. The provisions of paragraph 5 shall not apply to any internal quantitative
regulation in force in the territory of any 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. 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

8. 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. (Ex- cost of imported good production is higher in exporting
country but they will have to sell as per importer's price control)
- 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 of 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

9. EXCEPTIONS TO NATIONAL TREATMENT RULE
1. Government Procurement
- permits governments to purchase domestic products preferentially, making
government procurement one exception to the national treatment rule.
- This exception is permitted because WTO Members recognize the role of
government procurement in national policy.
- For example, there may be a security need to develop and purchase products
domestically, or government procurement may, as is often the case, be used as a
policy tool to promote smaller business, local industry, or advanced technologies
2. Domestic Subsidies
- allows for the payment of subsidies exclusively to domestic producers as an
exception to the national treatment rule
- The reason for this exception is that subsidies are recognized to be an effective
policy tool, and are recognized to be basically within the latitude of domestic
policy authorities.

10. 3. 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. In such
cases, countries can notify WTO Members and to initiate consultations. After
consultations are completed and under certain restrictions, these countries may
be permitted.
4. exception on screen quotas of cinematographic films

11. Case - Japan - Alcoholic Beverages
Complainants - Canada, European Communities, United States
Respondent – Japan
Measure at issue - Japanese Liquor Tax Law that established a system of internal
taxes applicable to all liquors at different tax rates depending on which category
they fell within. The tax law at issue taxed shochu at a lower rate than the other
products.
Product at issue - Vodka and other alcoholic beverages such as liqueurs, gin,
genever, rum, whisky and brandy, and domestic shochu.

12. - The European Community claimed that since "spirits" (in particular vodka, gin,
(white) rum, genever) are like products to the two categories of shochu, the
Liquor Tax Law violates GATT Article III:2, first sentence, by applying a higher
tax rate on the category of spirits than on each of the two like products, namely,
the two sub-categories of shochu.
- Canada claimed that whisky is a "directly competitive and substitutable product"
to both categories of "shochu", that by applying a higher tax rate on the
categories of whisky/brandy than on each of the two sub-categories of shochu,
the Liquor Tax Law distorts the relative prices of whisky and shochu, that in so
doing the Liquor Tax Law distorts consumer choice between these categories of
alcoholic beverages and thus distorts their competitive relationship.
- The United States claimed that the Japanese tax system applicable to distilled
spirits has been devised so as to afford protection to production of shochu
- The defending party, Japan, responded to the claims from the three complaining
parties. Japan claimed that the purpose of the tax classification under the Liquor
Tax Law is not to afford protection and does not have the effect of protecting
domestic production. Therefore, Japan argued that the Liquor Tax Law does not
violate Article III:2.

13. SUMMARY OF KEY PANEL
- like products - The Appellate Body upheld the Panel's finding that vodka was
taxed in excess of shochu, in violation of Art. III:2
- The Appellate Body upheld the Panel's finding that shochu and whisky, brandy,
rum, gin, genever, and liqueurs were not similarly taxed so as to afford
protection to domestic production
- the Appellate Body clarified three separate issues that must be addressed to
determine whether a certain measure is inconsistent with Art. III:2,
(i) whether imported and domestic products are directly competitive or
substitutable products;
(ii) whether the directly competitive or substitutable imported and domestic
products are not similarly taxed; and
(iii) whether the dissimilar taxation of the directly competitive or substitutable
imported and domestic products is applied so as to afford protection to
domestic production.

14. Korea Alcoholic Beverages (1999)
Complainants - European Communities, United States
Respondent – Korea
Measure at issue - Korea's tax regime for alcoholic beverages, which imposed
different tax rates for various categories of distilled spirits
Product at issue - Imported distilled liquors and Soju (traditional Korean alcoholic
beverage)
- Consultations were held in Geneva on 24 June 1997, between the United States
and Korea, and the European Communities and Canada participated as third-
parties.
- Another set of consultations were held on 8 August 1997, to address US requests
for further clarifications, but the parties were unable to settle the dispute.

15. Claims by Parties –
- European Communities - Korea, by according a preferential tax treatment,
through the Liquor Tax Law to soju vis-a-vis certain alcoholic beverages falling
within the same category Korea has acted inconsistently with Article III:2 of
GATT 1994, therefore nullifying or impairing the benefits accruing to the
European Communities under the GATT 1994.
- United States - Korea, under its general Liquor Tax Law, imposes a lower tax on
the traditional Korean distilled spirit soju than the high taxes it applies to other
distilled spirits such as whisky, brandy, vodka, rum, gin and "ad-mixtures".

16. Contentions by Korea –
- Korea maintains a multi-tiered taxation regime on the sale of alcoholic beverages.
- Under the Liquor Tax Law of 1949, as amended, Korea creates various categories of distilled
spirits, on which it imposes different ad valorem taxes. (ad valorem tax, any tax imposed on
the basis of the monetary value of the taxed item. Literally the term means “according to
value.)
- The tax is payable by the manufacturer of the beverages or, in the case of imports, by the
importer. Tax liability accrues at the time of shipment from the factory (in the case of alcoholic
beverages made in Korea) or of withdrawal from the bonded warehouse (in the case of
imported alcoholic beverages).
- The Liquor Tax Law lays down a system of excise taxes applicable to all alcoholic beverages
(whether manufactured in Korea or imported) intended for consumption in Korea. The taxes
applied to the categories in dispute are in the form of ad valorem taxes.
- For the purposes of assessing the tax, the value of imported alcoholic beverages includes
transport and insurance costs as well as the import duty imposed. In other words, the tax base
for imports is the price noted on the import declaration when the goods are withdrawn from
the bonded warehouse (i.e., the CIF import value plus duty).
- Domestic alcoholic beverages are taxed on the value of production costs, sales costs (including
advertising), extraordinary costs, and profits, i.e., the tax base is the price of the goods when
they are shipped from the production site.

17. SUMMARY OF KEY PANEL/AB FINDINGS
- The Appellate Body upheld the Panel's conclusion that the Korean tax
measures at issue were inconsistent with Art. III:2,
- the Appellate Body upheld the Panel's findings that the products at issue were
“directly competitive or substitutable” within the meaning of Art.
- Korea's tax measures on alcoholic beverages were applied “so as to afford
protection” to domestic production within the meaning of Art. III:2,
- both the Panel and the Appellate Body once again emphasized the importance
of examining the “design, structure, and architecture” of the measures, as
previously clarified by the Appellate Body in Japan – Alcoholic Beverages

18. Chile Alcoholic Beverages (2000)