Jean Monnet Center at NYU School of Law


VII. The Scope of the Question

It is possible that the prevalence of the "aims and effects" debate is responsible for the modest attention paid to the interpretation of the requirements "less favorable treatment", taxation "in excess" or "so as to afford production", and "advantage" in the context of origin-neutral rules. That prevalence is understandable against the background of the two reports of the early 1990s which followed the "aims and effects" approach. 154 For the time being, however, the jurisprudence has taken another direction, and therefore the question as to what regulatory and objective factual circumstances amount to discrimination gains increased significance.

In the current absence of an "aims and effects" test, the scope of GATT Articles I and III determines how often governments need to rely on Article XX in order to justify their laws and practices. As described above, the diagonal comparison results in a broad scope of the non-discrimination obligations. Even a rule which favors the overwhelming majority of imports and places the vast majority of like domestic products at a disadvantage would still amount to a breach of Article III. The only condition is that there is some regulatory or tax distinction and at least one (potentially) imported unit of the disfavored type as well as one domestically produced unit of the favored kind.

With this qualification, the national treatment rule is no longer a prohibition of discrimination on grounds of origin, but becomes an obligation of equal treatment (invocable only on behalf of imports). A measure would only escape Article III where it precisely respects the limits of likeness or direct substitutability, i.e. it does not leave out any product that would still fall into the same category of like or substitutable products.

These qualifications, potentially limiting an otherwise excessive reach of the non-discrimination rules, might appear more significant than they truly are. Given the ever-increasing product differentiation and the constant invention of new goods in the post-industrial age, there appears to exist an ever denser, continuous range of products. 155 Some of these will always be sufficiently similar in functionality and other characteristics to qualify for likeness and competitiveness. It will often be difficult for the regulator to avoid distinguishing within such segments when imposing a product related standard, and even impossible where these segments overlap. The regulator might precisely want to draw such distinctions between risky and safe, or environmentally harmful and friendly, sub-types of goods in order to affect the consumers' choice between competing goods. 156 These differences will not always suffice to make the sub-types unlike one another, especially in light of a broad concept of likeness. 157 Denying direct competitiveness and substitutability on such grounds is even more difficult.

The case that there is no (potential) import of the disadvantaged type or no domestic production of the favored kind, certainly exists, but arguably is not too frequent and increasingly rare. The international trend throughout the history of the GATT has not only been marked by product differentiation in many countries, but also by strongly increasing trade and the move from inter- to intra-industry trade. Hence, in most cases, there is a potential import of the type of product which faces a prohibition or a higher tax and a national production favored by that rule. 158

The same applies in the context of GATT Article I:1, only that imports from one country have to be compared with imports from another country. In the area of taxation and regulation, there would thus still be a GATT violation in the event that there is no favored domestic production, provided that another country is able to import that item. Also border measures would come under this kind of scrutiny whenever they cross boundaries of likeness. For instance, tariff classification might often differentiate at a deeper level than likeness.159 When different tariff bindings are involved, only the lowest could arguably prevail.

Thus, there would be no doubt that the European ban on hormone beef and a required minimum percentage of recycled glass in glass containers are incompatible with GATT Article III:4 and equally with Article I:1. It would in fact be difficult to find measures, at least among rules applying to products on the basis of their physical characteristics, that would not contravene both national and most-favored-nation treatment.

In all those cases, the government introducing or maintaining a regulatory or tax distinction would act inconsistently with a GATT obligation and would have to resort to a justification under Article XX. For many measures aimed at protecting health and the environment, this does not pose problems because Article XX provides for a justification ground and the measure complies with the standards of the chapeau and of necessity, if applicable. However, Article XX contains no general justification, but only ten policy goals as justifying measures deviating from GATT obligations. There are more legitimate policy goals to be attained by imposing taxes or restrictions on the sale of certain products and thereby distinguishing between product categories. 160 For instance in the realms of culture, consumer protection (beyond life and health) and socio-economic policies in general (e.g. luxury tax), Article XX is not available. Several commentators have noted in support of "aims and effects" that Article XX imposes a significant burden on the state which may be inappropriate for origin-neutral measures. 161

In the countless cases in which the diagonal approach leads to a breach of GATT Article I or III, Article XX will impose significant restrictions on the exercise of national regulatory and fiscal autonomy. Wherever those standards are not satisfied, WTO Members partially lose their ability to affect the behavior of producers and consumers with legislative means in order to remedy market inefficiencies. 162 Theoretically, Members could always maintain these measures for domestic goods while sparing like imports by according to them the best treatment available domestically for any of the different sub-categories within the entire group of like products. In the global economy, however, governments usually attempt not to impair the competitiveness of their producers. Therefore, the option of reverse discrimination (treating imports better than domestic products) seems widely impractical. 163

Wherever the diagonal approach mandates the abolition of regulatory distinctions, it would thus exert pressure towards internal harmonization. 164 Despite this broad scope of the prohibitions provided for in GATT Articles I and III, there would, however, be no necessary simultaneous liberalization or deregulation effect. In contrast, in the European Community, the fundamental freedoms (free movement of goods, labor and capital, freedom of establishment and free provision of services) have produced such a deregulatory liberalization effect. However, this is due to the fact that the Court of Justice to a large extent interprets those fundamental freedoms as prohibitions of disproportionate restrictions, not just of discrimination. 165 Hence, the Member States of the European Communities had to abolish or relax a great number of national laws because the Court of Justice found them to be more restrictive than necessary. In contrast, the remedy for a most-favored-nation or national treatment violation is not the abolition or reduction of the burden imposed by the GATT inconsistent law, but only the abolition of the disadvantage imposed on like imported products. In the case of a national law providing for a distinction between like products, the WTO Member can abolish the disadvantage by equalizing the formerly diverse treatment among the entire group of like products. This equalization can occur at whatever level, 166 be it at the level of the more favorable treatment preexisting within the entire group of like products, at the level of the preexisting less advantageous treatment, or at any other, more or less restrictive, level. Thus, compared with the situation prior to the abolition of the discrimination, the new legislation is not necessarily less restrictive, whereas it necessarily harmonizes the preexisting origin-neutral disparity.

The preceding conclusions are also valid for GATT Article I:1, even though the language ("any advantage ... shall be accorded") might give rise to the opposite impression. The language may suggest that the best available treatment accorded to any of the sub-groups within the overall group of like products must be extended to all other sub-categories. This, however, would overlook that the Member in question is entitled to withdraw the advantage in the sense of Article I:1 altogether, unless it has bound itself (Article II). If it does so by equalizing the treatment within the overall group of like products, at whatever level, including a level which is less advantageous than the best treatment previously available, there no longer exists any advantage which is not accorded to all like products. If, due to a tariff binding, GATT Article II precludes the withdrawal of the advantage granted to a part of the like products, the Member in question has no other choice but to extend the best available treatment existing for imports to all like imports originating in other Members.

The harmonization obligation, in any event, exists in relation to imports, even if harmonization is not mandatory for domestic goods. As already mentioned, Members may retain the differential treatment among like domestic products, but under such circumstances they must accord the best treatment, which is available to any like domestic products, to all like imports.

The described harmonization effect may be undesirable from the point of view of the policies pursued. Indirect taxation remains possible at any harmonized level, but special excise taxes would very often contravene the GATT. The possibility of differentiating between different classes of goods might be even more vital in regulation, since there is no equivalent to a uniform sales tax rate. Here, the obligation of harmonization comes very close to liberalization, because the only alternative would be extending the restriction. If, for example, the asbestos ban contravened Article III:4, France could either permit (imported) asbestos or impose an identical restriction on asbestos and all like (domestic) substitutes. These would be the only options to remedy the national treatment violation (i.e. leaving aside justifications under Article XX). Since it is often impossible or unrealistic to extend the restriction, the diagonal approach, therefore, in practice, resembles a market access right, 167.

On the other hand, one may also welcome the effects the diagonal approach potentially generates. It expands the scope of the non-discrimination rule from a national treatment to an equal treatment obligation that prohibits distortions of competitive relationships where these distortions hurt (some) imports. In addition, one can doubt whether the possibilities of justification in GATT Article XX are insufficient for truly legitimate, proportionate and non-protectionist national policies violating this equal treatment obligation.

154 Panel Reports, U.S. - Malt Beverages, supra note 6, and U.S. - Taxes on Automobiles, supra note 81.

155 An indication of this development is the continuously increasing number of tariff positions for differently defined products. This phenomenon arguably is not only due to the emergence of new products that previously did not exist, but also to increasing product variation in sectors where there used to be less diversity. The degree of the difference between distinct (yet similar) products thus diminishes as it relates to increasingly fine details.

156 Paul Farmer & Richard Lyal, supra note 123, at 69.

157 Appellate Body Report, EC - Asbestos, supra note 5, para. 100, with respect to Article III:4.

158 "Virtually always" according to Simon Lester & Kara Leitner, supra note 74, at 14.

159 See Steve Charnovitz et al., Green Roots, Bad Pruning: GATT Rules and Their Application to Environmental Trade Measures, 7 Tul. Envtl. L.J. 299, 317 note 103 (1994).

160 See also Edward S. Tsai, "Like" is a Four-Letter Word - GATT Article III's "Like Product" Conundrum, 17 Berkeley J. Int'l L. 26, 54 (1999).

161 Robert E. Hudec, supra note 31, at 622; Frieder Roessler, supra note 146, at 30; Daniel A. Farber, supra note 60, at 1298; Aaditya Mattoo & Arvind Subramanian, supra note 146, at 307-308.

162 Ole K. Fauchald, supra note 9, at 217.

163 See also Ole K. Fauchald, supra note 9, at 236; Paul Farmer & Richard Lyal, supra note 123, at 69.

164 See also Ole K. Fauchald, supra note 9, at 400.

165 An exception is Article 90 EC, the provision mandating non-discrimination in the area of internal taxation of goods. See supra section V.A.

166 E.g. Panel Report, 1987 Japan - Alcoholic Beverages, supra note 49, para. 5.13.

167 See also Robert Howse & Elisabeth Tuerk, supra note 31, at 288, 310, 311, however, in relation to the interpretation of "like products".




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