General Principles of International Trade Law

Article III(2), taxes. Imported products 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, and no contracting party shall otherwise apply internal taxes to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

Article III(4), regulation. Imported products 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 paragraph does not prevent differential internal transport charges based exclusively on the economic operation of the means of transport and not on the nationality of the product.

Article III(5) forbids internal quantitative regulations requiring that a specified amount or proportion of a product be supplied from domestic sources, which is the local-content rule.

The relationship between the two rules. Most-favoured-nation treatment forbids discrimination between foreign products; national treatment forbids discrimination between foreign and domestic products once the goods are inside. Together they mean that once a product has crossed the border and paid the tariff, it must be treated like everything else on the shelf.

Why article III is drafted in two limbs. The first sentence of III(2) is a strict test, more than the tax on like domestic products, with no defence of purpose. The rest of III(2), and III(4), import the protective purpose test in III(1). The distinction is the reason a small tax difference between like products is unlawful without more, while a difference between products that are merely competitive is unlawful only if it affords protection.

Tariffs, and the preference for them: article II and article XI

Article II, schedules of concessions. Each member binds its tariffs in a schedule annexed to the Agreement and accords to the commerce of the other members treatment no less favourable than that provided in its schedule. A bound tariff may not be exceeded; an applied tariff may be lower.

Article XI(1), the general elimination of quantitative restrictions. 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 another party, or on the exportation or sale for export of any product destined for another party.

The system's basic architectural choice is in those two articles. Protection is permitted, and it must take the form of a tariff. Quotas, licences and outright bans are prohibited.

Why a tariff is preferred to a quota. A tariff is transparent, so everyone can see the level of protection. It is negotiable, so it can be bound and reduced. It is non-discriminatory in operation, since any importer who pays it may import. And it produces revenue for the State rather than a rent for whoever holds the licence, which is also why a quota invites corruption in a way a tariff does not.

Article XI(2), the exceptions: export prohibitions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting party; import and export restrictions necessary to the application of standards or regulations for the classification, grading or marketing of commodities; and certain import restrictions on agricultural or fisheries products connected with domestic supply management.

Article XIX, the safeguard. Where, as a result of unforeseen developments and of the effect of obligations incurred under the Agreement, a product is imported in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers of like or directly competitive products, the party may suspend the obligation or withdraw or modify the concession, to the extent and for such time as may be necessary to prevent or remedy the injury. That is emergency action against fair trade, and it is distinct from anti-dumping and countervailing duties under article VI, which answer unfair trade.

The general exceptions: article XX

The chapeau, and it is examined more than the subparagraphs. Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

(a) necessary to protect public morals;

(b) necessary to protect human, animal or plant life or health;

(c) relating to the importations or exportations of gold or silver;

(d) necessary to secure compliance with laws or regulations which are not inconsistent with this Agreement, including customs enforcement, the enforcement of monopolies, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices;

(e) relating to the products of prison labour;

(f) imposed for the protection of national treasures of artistic, historic or archaeological value;

(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;

(h) undertaken under an intergovernmental commodity agreement conforming to criteria not disapproved;

(i) restrictions on exports of domestic materials necessary to ensure essential quantities to a domestic processing industry during a price stabilisation plan;

(j) essential to the acquisition or distribution of products in general or local short supply.

How article XX is applied, and the order matters. The measure must first fall within one of the lettered subparagraphs, and then satisfy the chapeau. Doing it the other way round is the commonest error.

The words in the subparagraphs are not interchangeable. Some say necessary, which is a demanding test asking whether a less trade-restrictive alternative was reasonably available; others say relating to, which asks for a substantial relationship between the measure and the objective, and is easier to satisfy. So a health measure under (b) must be necessary, while a conservation measure under (g) need only relate to conservation, and (g) adds its own condition, that it be made effective in conjunction with restrictions on domestic production or consumption, which is a requirement of even-handedness at home.

The chapeau does not test the objective; it tests the application. A measure with a legitimate purpose fails the chapeau if it is applied so as to discriminate arbitrarily or unjustifiably between countries where the same conditions prevail, or as a disguised restriction on trade. In practice that has meant asking whether the State negotiated with the affected countries, whether it applied the measure flexibly to different conditions, and whether the procedure was transparent and open to review.

Article XX and the rest of this module. It is the door through which the health measures in [The International Health Regulations] and the environmental obligations in [UNDP and UNEP] enter the trading system, and the reason a trade obligation and a health or environmental obligation need not conflict. Article 31(3)(c) of the Vienna Convention, in [Interpretation of Treaties], does the rest of the work.

Article XXI, security exceptions, is separate and is drafted far more permissively, since it protects action a party considers necessary for its essential security interests.

Special and differential treatment

The Preamble of the Marrakesh Agreement recognises the need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development, and article XI(2) of that Agreement limits the commitments required of least-developed countries. Within GATT, Part IV on trade and development and the departures permitted from article I for preferences in favour of developing countries are the machinery, and the whole subject is the standing argument between formal equality of treatment and substantive equality of outcome.

Implementation in national law

Article XVI(4) of the Marrakesh Agreement. Each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements.

That is a positive duty to legislate, and it goes further than article 27 of the Vienna Convention, which merely denies a State the excuse of its own law. India has legislated repeatedly to conform, and [TRIPS] is the clearest instance.

A worked example

State AA taxes imported whisky at 30 per cent and domestically produced country liquor at 10 per cent, saying the two are different products. It grants State BB a tariff of 5 per cent on machinery while charging all others 12 per cent. It bans imports of a chemical outright on the ground that it damages the ozone layer, applying no restriction to the same chemical produced at home, and it negotiated with State BB about the ban but with nobody else.

The liquor tax. Article III(2), first sentence, applies if whisky and country liquor are like products: imported products must not be subject to internal taxes in excess of those applied to like domestic products, and no protective purpose need be shown. If they are not like but are directly competitive or substitutable, the second sentence and article III(1) apply, and the question becomes whether the taxation affords protection to domestic production. Calling them different products does not end the inquiry; likeness is decided on physical properties, end uses, consumers' tastes and habits and tariff classification.

The 5 per cent tariff for State BB. Article I(1): any advantage granted to a product originating in any other country must be accorded immediately and unconditionally to the like product of all other members. So the 5 per cent rate must go to everyone, unless State AA and State BB are in a customs union or free-trade area meeting article XXIV.

The import ban. Article XI(1) prohibits restrictions other than duties, taxes or charges on importation, so the ban breaches it. State AA must then find a subparagraph of article XX. Subparagraph (g), conservation of exhaustible natural resources, is the natural candidate, and clean air and the ozone layer have been treated as within the phrase. But (g) requires the measure to be made effective in conjunction with restrictions on domestic production or consumption, and State AA restricts nothing at home, so it fails there.

Suppose State AA also restricted domestic production. It would then reach the chapeau, and its negotiation with State BB alone, with no comparable effort towards other affected States, is the classic case of arbitrary or unjustifiable discrimination between countries where the same conditions prevail.

Change one fact: State AA pleads that its own constitution requires the ban. Article XVI(4) of the Marrakesh Agreement requires each Member to ensure the conformity of its laws, regulations and administrative procedures with its obligations, and article 27 of the Vienna Convention denies internal law as a justification.

Distinctions table

What it does NOT mean

Most-favoured-nation treatment is not confined to members. Article I catches an advantage granted to any other country.

It cannot be made conditional. The words are immediately and unconditionally.

National treatment does not apply at the border. The tariff itself is not a breach of article III; article III governs internal taxes and regulation.

Article XI does not forbid protection. It forbids protection by quota; protection by tariff is permitted, subject to the bindings in article II.

Article XX is not a general public interest defence. The measure must fit a listed subparagraph and then survive the chapeau.

The chapeau does not question the objective. It examines the application of the measure.

Necessary and relating to are not the same test. The first asks whether a less restrictive alternative was reasonably available.

Limits and criticism

Likeness carries more weight than it can bear. Whether two products are alike decides most disputes and is settled by criteria that were never designed to answer questions about how a product was made, so a State that wishes to distinguish goods by their production method, for environmental or labour reasons, finds the doctrine unhelpful.

Article XX is a closed list written in 1947. It says nothing about climate, about labour standards or about human rights, and every modern non-trade objective must be squeezed into public morals, human life or health, or exhaustible natural resources, which is interpretation doing the work that renegotiation should do.

Special and differential treatment is mostly hortatory. Most of Part IV is drafted as best endeavours, so the developing country provisions of the system deliver less than the formal architecture suggests.

Tariffs have fallen and non-tariff measures have not. The great achievement of the system was to bind and cut tariffs, and protection has migrated to standards, licensing, subsidies and regulation, where the disciplines are weaker and the disputes harder.

Quick revision

Article I, MFN: any advantage, favour, privilege or immunity granted to a product of any other country must be accorded immediately and unconditionally to the like product of all other members. Exceptions: historic preferences, article XXIV customs unions and free-trade areas, special and differential treatment.

Article III, national treatment: internal taxes and regulation should not be applied so as to afford protection to domestic production (III(1)); imported products not subject to internal taxes in excess of those on like domestic products (III(2)); treatment no less favourable in laws affecting internal sale, purchase, transportation, distribution or use (III(4)); no local-content requirements (III(5)).

Article II: bound tariffs in schedules. Article XI: no prohibitions or restrictions other than duties, taxes or other charges, whether by quotas or licences, subject to critical-shortage, standards and agricultural exceptions. Article XIX: safeguard against unforeseen developments causing serious injury.

Article XX chapeau: measures not applied as arbitrary or unjustifiable discrimination between countries where the same conditions prevail, nor as a disguised restriction on international trade. Subparagraphs: (a) public morals, (b) human, animal or plant life or health, (d) securing compliance with consistent laws including intellectual property, (e) prison labour, (f) national treasures, (g) conservation of exhaustible natural resources, in conjunction with restrictions on domestic production or consumption, and others. Fit a subparagraph first, then the chapeau. Necessary is stricter than relating to.

Marrakesh Agreement article XVI(4): each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations.

Test yourself

1. State the most-favoured-nation obligation and explain the significance of its wording.

Article I(1) of GATT provides that, with respect to customs duties and charges of any kind imposed on or in connection with importation or exportation, the method of levying them, all rules and formalities in connection with importation and exportation, and the matters in article III(2) and (4), 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. Three phrases matter. Any other country, not any other party, so a benefit granted to a non-member is caught and cannot be used to escape the obligation. Immediately and unconditionally, so the benefit cannot be delayed or made to depend on reciprocity. And like product, which is the comparison the obligation runs between, judged on physical properties, end uses, consumers' tastes and habits, and tariff classification.

2. Distinguish most-favoured-nation treatment from national treatment.

Most-favoured-nation treatment under article I forbids discrimination between the products of different foreign countries: whatever advantage one foreign product receives, every like foreign product must receive immediately and unconditionally. National treatment under article III forbids discrimination between imported and domestic products once the goods are inside the country, requiring that imported products not be subject to internal taxes in excess of those on like domestic products and that they receive treatment no less favourable in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The first operates at and beyond the border, the second internally after importation, so the tariff itself is not a breach of article III. Together they mean that a product which has crossed the border and paid the tariff must be treated like everything else on the market.

3. Why does the system prefer tariffs to quantitative restrictions?

Article XI(1) prohibits prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, while article II permits protection through bound tariffs. The preference has four reasons. A tariff is transparent, so the level of protection is visible to everyone rather than hidden in an administrative allocation. It is negotiable, so it can be bound in a schedule and reduced in successive rounds. It is non-discriminatory in operation, since anyone willing to pay it may import, whereas a quota must be allocated and the allocation is discriminatory by nature. And it produces revenue for the State rather than a rent for whoever obtains the licence, which is also why quotas invite corruption. Article XI(2) permits exceptions for temporary export restrictions to relieve critical shortages, for measures necessary to apply standards for classification, grading or marketing, and for certain agricultural and fisheries restrictions.

4. How is article XX applied?

In two stages, and in that order. The measure must first be shown to fall within one of the lettered subparagraphs of article XX, and only then is it tested against the chapeau. The subparagraphs are not drafted alike: those using necessary, such as (a) public morals and (b) human, animal or plant life or health, impose the stricter test of whether a less trade-restrictive alternative was reasonably available, while those using relating to, such as (g) conservation of exhaustible natural resources, require a substantial relationship between the measure and the objective, and (g) adds the further condition that the measure be made effective in conjunction with restrictions on domestic production or consumption. The chapeau then examines not the objective but the application: the measure must not be applied in a manner constituting arbitrary or unjustifiable discrimination between countries where the same conditions prevail, nor a disguised restriction on international trade.

5. What is a safeguard measure, and how does it differ from an anti-dumping duty?

A safeguard under article XIX is emergency action against fair trade. Where, as a result of unforeseen developments and of the effect of obligations incurred under the Agreement including tariff concessions, a product is being imported in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers of like or directly competitive products, the importing party may suspend the obligation in whole or in part, or withdraw or modify the concession, to the extent and for such time as may be necessary to prevent or remedy the injury. Nothing wrongful need have been done by the exporter. Anti-dumping and countervailing duties under article VI, by contrast, respond to conduct the system treats as unfair, namely the sale of a product below its normal value, and subsidisation, and they are imposed on the goods of the particular exporter rather than on imports generally.

6. What is the relationship between trade obligations and health or environmental obligations?

They are not in conflict as a matter of course, and three provisions keep them apart. Article XX of GATT permits measures necessary to protect human, animal or plant life or health, and measures relating to the conservation of exhaustible natural resources made effective in conjunction with restrictions on domestic production or consumption, subject to the chapeau. The Preamble of the Marrakesh Agreement records the objective of sustainable development and of protecting and preserving the environment, and by article 31(1) and (2) of the Vienna Convention a preamble is part of the text for interpretation. And article 31(3)(c) of that Convention requires that any relevant rules of international law applicable in the relations between the parties be taken into account, so the environmental and health treaties binding the same States bear on the meaning of the trade obligations. What remains difficult is that article XX is a closed list drafted in 1947, so modern objectives must be fitted into categories written before they existed.