Can Member States Retain Meaningful Regulatory Autonomy Regarding the GATT?

International Trade Law

1. Critically discuss the following statement: ‘The National Treatment principle under Article III of the GATT and the so-called necessity test under Article XX make it virtually impossible for member states to retain any meaningful form of regulatory autonomy.’

I. Introduction

In the following essay, I will discuss whether it is actually virtually impossible for member states to retain any meaningful form of regulatory autonomy regarding the named articles of the GATT. The articles will be laid out first and then interpreted. This work will start by explaining the national Treatment principle under Article III of the GATT. Thereafter, the necessity test under Article XX of the GATT will be discussed, and its impact will be examined. It will be pointed out that although the autonomy of a nation is limited by the given Articles of the GATT, there are still some options which make it possible for a member state to have an impact in domestic policy. Therefore, it is possible to maintain a meaningful form of regulatory autonomy.

II. National Treatment principle under Article III GATT

The national treatment principle marks one of the key principles of the WTO Agreement. According to this rule, members are not allowed to act in a discriminatory way regarding imports. This means that imports and “like” domestic products must be treated equally. By this rule, countries are prevented from setting up discriminatory measures on imports and from counteracting the consequences of tariffs through non-tariff measures. Its goal is, therefore, the elimination of masked domestic barriers. WTO-members are bound to the rule that all imported products are treated no less favourably than the importing countries counterpart. Without loyalty to this principle, a balance of rights and obligations cannot be maintained, as this is essential for the maintenance of the multilateral trading system.[1]

Article III of the GATT has many requirements for the nations that are bound by it. In order to have a perspective on whether these nations still retain meaningful autonomy, these have to be laid out.

In general, as has already been noted, Article III of the GATT requires that the Member states provide a treatment to the product which does not differ from its own. Article III 1 imposes that members are not allowed to demand ‘internal taxes or other internal charges, laws, regulations, and requirements affecting imported or domestic products so as to afford protection to domestic production’[2]. This is combined with paragraph 2, which requests that nations do not apply any taxes or other internal charges that are higher than those for domestic products.[3] The products have to be “like” domestic goods or directly competitive/substitutable.[4] According to paragraph 4, no less favourable treatment, in the context of internal regulations and law, is permitted for “like products” of national origin.[5]

The highlighted paragraphs above mostly refer to “like” products. To detect similar goods, GATT panel reports came up with some criteria. These include “tariff classifications, the product’s end uses in a given market, consumer tastes and habits, and the product’s properties, nature, and quality”[6]. 

In general, violations of the Article, understood as discriminations, can be split into two groups. The first group is the “de jure” discrimination. Typically, in this category is a law or regulation which imposes a more demanding and, therefore, different rule in contrast to domestic goods. It only creates a breach of the GATT if this is actually happening.[7] This does not have anything to do with the goods price, but may include, for example, selling requirements. In ‘Korea versus Various measures of beef’, foreign meet had to be sold in specific stores and was not allowed to be sold in stores which sell domestic meet, unless it was in a different section of the store.[8] These cases are of importance, as they show that the separate treatment is evidence for a deliberate policy.[9]

The second type of discrimination is called “de facto” discrimination. It refers to administrative measures which do not explicitly differ between foreign and domestic products but nonetheless create burdens for foreign products that are wrongful or illegitimate.[10] Of great importance for determining whether a discrimination exists is the establishing of criteria by which a wrongful act can be determined.[11] A conclusion with regards to the Articles III 2 and III 4 is that imports are treated less favourably than their domestic counterparts. To do so, the law or regulation has to divide the goods into classes. A violation exists if this separation is illegitimate and, consequently, the foreign product treatment is wrongful. A separation by nation of origin is per se wrongful.[12]

As can be seen already, the national treatment principle has some significant obligations for member states. However, although national treatment is an elemental principle, there are some exceptions to the rule, as shown now.

Paragraph 8 of Article III GATT allows governments to buy domestic products more favourably. This allows the guiding of the nation’s economy, to some extent. This is permitted by the GATT due to the fact that WTO members accept the government’s role in national policy. In some cases, there might be a need for a more secure domestic production, as it is part of a countries protection system. Another reason might be that small businesses, domestic industry or advanced technology needs to be secured to withstand the foreign influences.[13] There has been an agreement on Government procurement in the Uruguay round which “mandates signatories offer national treatment in their government procurement”[14]. However, as this is not an obligatory agreement, mostly developed nations have joined, but no one else has. This means that for the majority of nations the exception is still available, as it only applies within the accepting nations.[15]

As a second exception, states are, according to paragraph 8 Article III GATT, allowed to pay subsidies exclusively to domestic companies. The major condition is that this does not violate other arrangements in Article III GATT, as well as the Agreement on subsidies and countervailing measures.[16] As subsidies affect trade negatively, there are strict conditions regarding their use.[17] This exception exists because subsidies are accepted as an effective policy tool and do no contrast with the room in which a national policy authority is allowed to move.[18]

Another major exception to the rules of Article III GATT marks the existence of Article XVIII C GATT. This paragraph undermines the national treatment obligation in some extent and is, therefore, of great interest for the given statement.

WTO-members who are in an early stage of development have the ability to take measures that raise their standard of living, even if they are inconsistent to the GATT. If they want to promote the endowment of not yet grown parts of the economy, using governmental measures which are in inconsistence with GATT, they can relate to the named article. To fulfil its restrictions, the country has to notify the WTO-members about the planned actions and start consultations with them. If these are done and certain restrictions are agreed on, the GATT inconsistent measure can commence.[19] However, these actions are not allowed to interfere with the obligations set up in articles I, II and XIII.  As the goal of Article XVIII is to establish the building of domestic infant industries, broader measures and violation of the national treatment obligations are allowed.[20]

As the general background has been laid out, it has to be determined whether, and to what extent, the national treatment principle under Article III restricts the meaningful regulatory autonomy of a WTO-member.

It is important to stress that a member-state of the WTO did agree to the given article when becoming part of the WTO. The country did this because it felt that trade liberalisation is a tool which helps build up the economy and a countries wealth. If not, membership of the WTO is of no great use. To establish these trade liberalisation intentions, former protectionist tools are now forbidden. This, of course, limits a nations autonomy significantly.

If a country still wants to be able to put these into action, it must be asked why the country wants to retain some of the given-up power, regarding Article III, for itself.

Countries in which the importation of goods outweighs exportation tend to use discriminatory measures to protect their national production. Mostly, this is the result of pressure from the domestic economy. These measures are often barriers to trade and create a lack of transparency and predictability.[21] Moreover, they lead to a reduction in economic welfare, as they lead to a distortion of the conditions of competition.[22] This demonstrates that it is not of use to a countries economy to infringe Article III. A regulatory autonomy regarding this is therefore not necessary, and a widespread autonomy, which means de facto working against Article III, would be counterproductive.

Nevertheless, if a country wants to give in to the economy`s pressure, it still has some ways of doing so without inflicting Article 3 and risking an infringement process. As listed above there are some exceptions to the rule and, by using them, the effects can still be of great significance.

If a country wants to strengthen specific branches, it can support them by giving subsidies. If they are within the generally accepted rules, they are able to rescue and/or develop to some extent. For example, the European Union financed farmers with nearly €60 billion in 2018.[23] Even if this disrupts the market in comparison to foreign products it is, though a topic of much debate, a legal practice. This shows that although impactful Article III GATT measures can be enacted, meaningful regulatory autonomy is still given. This includes products which can be bought more favourably by governments. They can manoeuvre the financial flow in some areas. If there is a need for police cars or military equipment, for example, governments are able to buy domestic products preferably.  As these types of purchases can be high in price, an impact can be guaranteed. This is especially apparent in domestic military industry, as such industries are heavily reliant on their own governments purchases. This shows that although Article III of the GATT exists, whole industries can be secured by a governments action. A meaningful regular autonomy is therefore present.

Article XVIII C shows that, at least for underdeveloped states, there is even a way to violate Article III without being charged. Of course, this type of action needs the approval of the other members, but it shows that boundaries can be stretched.

Finally, it has to be noted that the national treatment obligation does not mention how high or low taxes shall be. Certainly, foreign and domestic taxation has to be equal, but the specific calculations are still within a member states power. Whilst a government cannot distinguish between the same products, it can differ among varying ones. This is still of great power. 

III. Necessity test under Article XX GATT

Another exception to the general rules marks Article XX GATT. In contrast to the Article mentioned before, Article XX GATT will only be invoked by a member if a measure of that member had been found to be inconsistent with another GATT provision.[24]

It is then used to justify such a GATT-inconsistent measure. Article XX GATT therefore provides for limited and conditional exceptions from obligations.[25] It applies to every Article of the GATT. By managing the members rights, it intends to regulate the relationship between a member’s autonomy rights, and the trade liberalization interests of the other WTO-member states.[26]

They are limited, as the exceptions listed are exhaustive.

The word ‘necessary’ has been subject to much debate within GATT and WTO jurisprudence. This causes the complexity of the necessity test and, as it is a multifactor approach, it is subject to inconsistent application.[27]

The ‘necessary’ requirement is not included in every subsection of Article XX GATT. The term must be understood as maintaining the “minimum derogation principle”.[28] This means the court must consider “whether there are alternative measures reasonably available that would be as effective as the one adopted”[29] and “are either WTO consistent or, if not WTO consistent, less trade restrictive than the measure which was actually adopted”[30]. If such alternative measures can be presented, not by the defending but by the accusing WTO-member, the chosen action will fail to be secured by Article XX.

For the necessity test, three key aspects must be compared and evaluated against each other. Firstly, how important the protected measure is must be analysed, then how much this action restricts trade and, thirdly, of how much importance the measure is for achieving the goal of protection.[31]

The more trade restrictive a measure is, the more it needs to have an important necessity. The trade restrictive action must never be of greater impact than the necessity it guards against.[32]

It must be understood that the word ‘necessity’ underlines that there is no alternative to accomplish the chosen goal. If the achievement is ‘necessary’, it is essential and cannot be balanced against anything else.[33] However, it has been consistently ruled that it “is not the necessity of the policy objective that is to be examined, but the necessity of the measure to achieve the intended policy objective”[34].

GATT Article XX provides exceptions for several normally GATT violating acts if they are based on some domestic goals. These reasons, that might be justifiable policies, are organized in subparagraphs. They include inter alia: the protection of public morals(a), the protection of human, animal or plant life or health (b), customs enforcement/cross-border regulations (subparagraph (d), and conservation of exhaustible natural resources (g).[35]

Whilst the chapeau describes how the measures got to be applied, the accepted measures are listed in the subparagraphs.

The chapeau of Article XX states that the given objectives shall not be abused and used to restrict international trade in an unjustifiable manner.[36] Therefore the chapeau marks the tool within Article XX which is set up to prevent an unrestricted use.

The difference between the subparagraphs and the chapeau is of importance for the actual practice, as it has some effect regarding the methods of implementing WTO decisions in dispute settlement policy.[37]

If a measure fails to meet the obligations of the subparagraphs, it has to be corrected. On the other hand, if a measure that in not within the spectrum of the chapeau, the WTO-member simply needs to re-evaluate how to implement it.

The burden of proof lays with the party that implemented the concerned measure, as it benefits from the privilege.[38] If an imposed action is identified as violating the GATT, the member state needs to show that the measure is within one of the subparagraphs and does not violate the measures of the chapeau, whilst the complaining country needs to claim that the measure does not fulfil any one of these burdens.

The ‘necessity’ test under Article XX GATT implements some further exceptions to the given basics of the GATT. It helps a member state to secure some areas of domestic politics to internally govern. This means that some regulatory autonomy is saved. The use of Article XX can be of significant power, as it is, for example, in establishing import bans. However, it must be emphasised that a country cannot always rely on Article XX as it is subject to the WTO-institutions (Panel, Appellate-body) view on the legal matter. Because of the ‘necessity’ test, it must be proven that a countries measures are within this legal philosophy. This limits a nations autonomy regarding Article XX significantly.

On the other hand, it is, despite onerous conditions, possible to undermine basic WTO-regulations[39]. Furthermore, as the use of Article XX is a defence mechanism and is used to legitimise a country’s measure, it needs an accusing member, first. This means that, by using this Article as a defence, much time can be bought as establishing panels takes time.

IV. Conclusion

Article III and its national treatment principle has been set out, and there has been discussion on how the ‘necessity’ test under Article XX works.

Article II, as well as Article XX of the GATT, limits a nations regulatory autonomy, but this must not be seen as a contrary action to national beliefs. When talking about meaningful autonomy, it is important to stress that all WTO-members believe in the concept of free trade. To achieve this goal, all nations must give up some power for a greater objective. On the other hand, this does not mean that there are no possibilities within these articles with which a country can influence the flow of trade. Article III names exceptions to its rules, and, although the necessity test under Article XX creates some hurdles, it is possible to act acceptably even when the measures taken are normally inconsistent with GATT. This shows that it is not impossible for a member state to retain some meaningful form of autonomy, even though the GATT does limit it to some extent.

Bibliography:

Books:

• Hudec, Robert E.; SCOPE FOR NATIONAL REGULATION (GATT/WTO Constraints on National Regulation: Requiem for an "Aim and Effects" Test 1998) p.624
• Peter van den Bossche, Peter and Prévost, Marie Denise, Essentials Of WTO Law (1st edn, Cambridge University Press 2016).
• Van der Bossche, Peter and Zdouc, Werner, World trade organization- Texts, cases, material (Cambridge University press 2017) 345-547

Cases:

• CHINA – Measures affecting trading rights and distribution services for certain publications and audiovisual entertainment products 2012 WTO Appellate Body, WT/DS363/19 (WTO Appellate Body).
• Japan - Taxes on Alcoholic Beverages [1996] WTO Apallate Body, WT/DS8/AB/R (WTO Appellate Body)

Journals:

• Doyle, Christopher; Gimme Shelter: the “necessary”element of GATT article XX in the context of the china-audiovisual products case (Boston University International Law Journal Vol.29:143) 152
• Kenney, Kevin C; International Trade Regulation 270 (Vicki Been et al. eds., Aspen 2009) (citing Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R (Nov. 6, 1998)
•  NATIONAL TREATMENT PRINCIPLE; Report on the WTO consistency of trade policies by major trading partners (METI Ministry of Economy, Trade and Industry 2003) 197-331
• Note by the Secretariat; "NECESSITY TESTS" IN THE WTO (S/WPDR/W/27 2003) 4

Websites:

• The common agricultural policy at a glance https://ec.europa.eu/info/food-farming-fisheries/key-policies/common-agricultural-policy/cap-glance_en 18.01.2020

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[1] NATIONAL TREATMENT PRINCIPLE; Report on the WTO consistency of trade policies by major trading partners (METI Ministry of Economy, Trade and Industry 2003) 197

[2] Ibid.,

[3] Japan - Taxes on Alcoholic Beverages [1996] WTO Apallate Body, WT/DS8/AB/R (WTO Apallate Body).

[4] Ibid.,

[5] Ibid.,

[6] Ibid., 198

[7] Hudec, Robert E.; SCOPE FOR NATIONAL REGULATION (GATT/WTO Constraints on National Regulation: Requiem for an "Aim and Effects" Test 1998) p.624

[8]Van der Bossche, Peter and Zdouc, Werner; World trade organization- Texts, cases, material (Cambridge University press 2017) 345

[9] Hudec, Robert E.; SCOPE FOR NATIONAL REGULATION (GATT/WTO Constraints on National Regulation: Requiem for an "Aim and Effects" Test 1998) p.624

[10]  Ibid.,

[11] Ibid.,

[12] Ibid.,

[13] NATIONAL TREATMENT PRINCIPLE; Report on the WTO consistency of trade policies by major trading partners (METI Ministry of Economy, Trade and Industry 2003) 197

[14] Ibid.,

[15] Ibid.,

[16] Ibid.,

[17] Ibid.,

[18] Ibid., 199

[19] Ibid., 199

[20] Ibid., 199

[21] Ibid.,

[22] Ibid.,

[23] The common agricultural policy at a glance https://ec.europa.eu/info/food-farming-fisheries/key-policies/common-agricultural-policy/cap-glance_en 18.01.2020

[24] Van der Bossche, Peter and Zdouc, Werner, World trade organization- Texts, cases, material (Cambridge University press 2017) 547

[25] Ibid.,

[26] "NECESSITY TESTS" IN THE WTO

 Note by the Secretariat1 page 4 2 December 2003 S/WPDR/W/27

[27] Doyle, Christopher; Gimme Shelter: the “necessary”element of GATT article XX in the context of the china-audiovisual products case (Boston University International Law Journal Vol.29:143) 152

[28] Ibid.,

[29] Kenney, Kevin C; International Trade Regulation 270 (Vicki Been et al. eds., Aspen 2009) (citing Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R (Nov. 6, 1998)

[30] Ibid.,

[31] ‘Essentials of WTO Law’ (n. 15), 90.

[32] CHINA – MEASURES AFFECTING TRADING RIGHTS AND DISTRIBUTION SERVICES FOR CERTAIN PUBLICATIONS AND AUDIOVISUAL ENTERTAINMENT PRODUCTS [2012] WTO Appellate Body, WT/DS363/19 (WTO Appellate Body).

[33] Note by the Secretariat; "NECESSITY TESTS" IN THE WTO (S/WPDR/W/27 2003) 4

[34] Ibid.,

[35] Ibid.,

[36] NATIONAL TREATMENT PRINCIPLE; Report on the WTO consistency of trade policies by major trading partners (METI Ministry of Economy, Trade and Industry 2003) 331

[37] Ibid.,

[38] Ibid.,

[39] see exceptions under Article III