Three questions have to be taken into account in order to determine whether or not the national treatment obligation has been violated by the members of WTO.
1. Whether the issue in hand is a requirement, regulation or a law which affects the internal sale , distribution, purchase, transportation and offering for sale or not.
The term like products is a disputed area with respect to the Article III. The word is interpreted in two ways to achieve a meaning. In one approach a flexible definition is given to the word “like” and a strict literal meaning has been provided in the other approach. In the recent panel ruling of Japan- Alcoholic Beverages 1998, Case 98B which was latter brought to scrutiny of the appellate under the rule of the latest WTO Dispute Settlement Understanding (Horn and Mavroidis 2004). Firstly the word was interpreted in a strict way and the appeal to mitigate the damage further intensified the confusion over the term. Presently the national treatment obligation is not clear and too harsh application of the word likely would make matter more difficult. The court in US- Malt beverages took into account regulatory purpose it cannot be considered as violation of the agreement. The court merely pointed out what was actually lacking in the agreement. It was confirmed by the appellate body of EC- Asbestos that the word like can have different meanings and may mean different things with respect to the first sentence of Article III:2 and Article III:
In order to be covered by Article III: 4 a measure must be an internal regulation or rule dealing with the sales, distribution transport and use of goods. For example the rule that cigarettes which are imported cannot be moved out of a warehouse unless stamp duty are paid and attached on them in the presence of a tax inspector as per panel reports-Dominican republic. In the case of Canada-Alcohol II case there was a rule of fixing a minimum sales price (Swiss National Science Foundation 2017).
The other issue which has to be determined is whether there was a less favorable treatment or not. Thus it has to be verified by the panel that the regulation or requirements had been made to protect the domestic product or not. In the case of Korea- various measures on Beef 2001 it was provided by the court that it was not important or sufficient that different treatment of imported and domestic goods account to violation of the WTO agreements the panel has to take into account the fact that the measure had changed the competition condition causing detriment to the imported goods or not according to Article III:4. In the case of EC-Bananas III separate deliberation that the rule in question has been passed to modify the competition terms to make it difficult for the imported product is not required to determine contravention of Article III:4. The reason for passing the regulatory measure must be considered in order to determine whether a less favorable treatment has taken place or not. Thus only because a measure has caused an adverse impact on the condition of the competition does not prove that the member state has violated the provision of the agreement. However in a latter decision in the case of EC-asbestos a totally different view was taken by the appellate body. The decision of the appellate court in EC – Asbestos restored to the original decision in Japan –alcoholic beverages as article III rules over all its subsections it provides the interpreters a guideline to determine the question. Thus in order to determine a question about breach Article III has to be read together with Article III:
The House of Commons expressed their concerns about the impact of the Uruguay Round on various industries especially the auto manufacturing. However, the Minister of Trade assured that the new trade regime shall not have any adverse impact on the automobile sales and production in the country. the Uruguay rounds merely reduces the tariffs on manufactured goods and permits the Canadian made vehicles to be exported to third countries beyond the United States. Therefore, the agreement does not adversely affect the Canadian automobile industry. Further, the minister assured that it is expected that Japan would expand the auto production of Canada in future as the Uruguay Round arrangements has enhanced the chance for investment by automobile companies from overseas (Baldwin 2016).
However, both Europe and Japan after the completion of three years of adoption of the new trade agreement, made a complaint against Canada targeting the auto mobile industry of the country on the ground that a bilateral treaty signed between US and Canada – the Agreement concerning Products known as the Auto pact was inconsistent with the WTO Agreement. The Auto Pact formed a trade agreement for cars and its parts that is free in certain sectors. Canada entered in to this agreement with the United Sates in order to deal with the problems related to developing a strong base for auto-manufacturing in a small domestic market (Hoekman and Mavroidis 2015). The duties on the imported parts and limited production volumes prevented Canadian auto manufacturers from competing in the sectors.
The Canadian vehicle and parts producers always face higher costs compared to the non-Canadian competitors no matter how carefully and diligently the Canadian vehicle producers managed their business operations and took advantage of the modern technologies (Thomas 2016). However, the Auto Pact resolved the problem by placing the car companies of the United States to enhance their production in Canada so that their vehicles are sold in its domestic market duty –free. The Auto Pact has proved to be an immense success in Canada as the Auto –auto parts manufacturing in Canada developed under the Auto Pact policy (Manger 2016).
The auto pact allowed a company manufacturing automobiles in Canada to import cars and car parts duty –free on the fulfillment of two essential conditions:
A car manufacturer must attain a minimum level of Canadian Value added (CVA) in its local production equivalent to the CVA that existed in 1968 model year;
While implementing the treaty, Canada extended the same duty-free treatment to all the GATT members because of which the auto manufacturers from other countries became entitled to the duty-free terms after they met the essential conditions. The extended eligibility for the non-US based auto manufacturers to the duty–free treatment was terminated with the US–Canada Free Trade Agreement in 1989 (Lysenko, Mills and Schwartz 2017). The US trade negotiators insisted to prohibit the other companies from participating in the Auto Pact and hence, the car manufacturers of other countries were not entitled to the duty-free imports even after fulfilling the essential conditions. This caused damage to the Japanese companies who were in the process of speeding up their Canadian production in order to fulfill the Auto Pact conditions.
After 1989, the list of manufacturers who were granted exemptions were closed except such companies who remained to be qualified. Such companies mainly included US based manufacturers such as Ford, GM, Volvo (European manufacturer) and Chrysler. Although these manufacturers were permitted to bring their vehicles as per their wish but in reality, the manufacturers mainly imported those vehicles that they made themselves. Consequently, although the measure was not de jure discriminatory but it became de facto discriminatory. These manufacturers only brought in American cars whereas Volvo imported Swedish cars. Since cars belonging to these countries were given an advantage that was not enjoyed by cars from other WTO members due to which the Auto Pact was said to have infringed the MFN treatment.
The complaints brought before the Panel and the Appellate Body by Japan and the European communities were complicated as they alleged that the measures taken by the Canadian government were in consistent with several provisions in various WTO agreements. They include GATT 1994, the Agreement on Trade- Related Investment Measures (TRIMS), SCM and the General Agreement on Trade in Services (GATS).
During the proceedings, Canada advanced arguments on the ground that the origin of terms of the Auto Pact was neutral. Canada further argued that the car manufacturers are at liberty to bring in any vehicle that they wish to bring in. The Pact did not include any provision that stated that the car manufacturers have to import a car from any specified country. Furthermore, the pact does not entail that the vehicle manufacturers are prohibited from importing on the ground of their origin or nationality. Canada contended that Article I: 1 of GATT includes de jure discrimination therefore, Canada cannot be held accountable for decision made with respect to the private car manufacturers who had been provided the exemption of duty free access.
Article 1.1 prohibits discrimination between products that are destined for or originated in different countries (Rubini 2014). The article purports to ensure equal opportunity is provided to import from and export to other countries that are members to the WTO Agreement. For instance- where States A and B have entered into agreement with the conditional MFN obligation and State A grants an advantage to State C regarding the type covered by the agreement, then State A must grant the same advantage to State B provided State B fulfills the conditions of the agreement. The conditions of the agreement would require State B to offer the similar benefits to State A as was offered by State C to State A.
The significance of the MFN clause lies in the fact that it safeguards the bilateral concessions and simplifies them as the basis for the multilateral trading system. The interests of the small trading countries are safeguarded by the MFN clause.
In regards to the challenge brought against the Auto Pact treaty between the US and Canada, European communities and Japan argued that the limitation on the eligibility for exemption on import duty in respect of certain vehicles manufacturers is contrary to Article I:1 as it leads to de facto discrimination in favor of the products in certain countries. The Appellate Body sustained Panel’s finding according to which the exemption on duty was inconsistent with the MFN treatment obligation under Article I:1 on the grounds that the article encompasses both de jure and de facto discrimination as per several GATT panel reports (Holmes, Rutherford and Carey 2017). The panel discovered that although the car manufacturers were allowed to bring in vehicles as per their wishes but in reality, the car manufacturers imported only those cars that they manufactured themselves or those from affiliated companies.
The Appellate Body stated that Article I:1 does not refer to some advantages instead it refers to ‘any advantage’ that may be granted to the subjects that comes under the article. Further, the advantage shall not be restricted to ‘some products’ instead it refers to “any products’ that are originated in or destined for ‘all other members’ and not ‘other members’. Therefore, the Appellate Body held that GATT I:1 should be construed in a manner that includes both de jure and de facto discrimination and same market advantages must be immediately and unconditionally extended to all WTO trading partners.
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