MODULE II

Trade in Goods and Supplementary Agreements

2.1 Trade in Goods: Difference between GATT 1947 and GATT 1994; Objectives and
Functions, Membership, Accession and Institutional Aspects; Non-Discrimination: Most
Favoured Nation Treatment and National Treatment; Concept of Likeness; Market Access
Principle; Tariffs, Quotas and Non-Tariff Barriers to trade in goods; General Exceptions;
Developing Countries under GATT, 1994.
GATT 1994: TRADE IN GOODS
The genesis of the General Agreement on Tariffs and Trade (GATT) can be traced back to the
Bretton Woods Conference of 1944. This conference aimed to address the economic issues
arising from World War I's Versailles Treaty and establish a new international monetary system
to support postwar reconstruction, economic stability, and peace.

While the Bretton Woods Conference primarily established the International Monetary Fund
(IMF) and the International Bank for Reconstruction and Development (the World Bank), it also
recognized the necessity for an international institution to address growing trade concerns. The
United States, in particular, pushed for a forum where wartime allies could negotiate reciprocal
reductions of tariffs on trade in goods.

The result was the inception of the GATT in 1947, initially with 23 member countries. The
GATT acted as a provisional agreement until the formation of the World Trade Organization
(WTO) in 1995. Over time, the GATT evolved and expanded its scope, eventually becoming a
crucial component of the modern-day WTO, which now has 160 member countries, covering
approximately 96.4 percent of world trade, with the potential to increase further.

Provisional application

The General Agreement on Tariffs and Trade (GATT) had its roots in the post-World War II
efforts to establish international economic institutions. Initially conceived at the Bretton Woods
Conference in 1944, the intention to create a multilateral trade institution was reinforced by a
resolution from the United Nations Economic and Social Council in 1946, calling for the drafting
of a charter for the International Trade Organization (ITO).

The Geneva Meeting of 1947 played a crucial role in shaping the GATT and the world trading
order. It was divided into three parts: preparing a charter for the ITO, negotiating a multilateral
agreement to reduce tariffs, and drafting general clauses of obligations related to tariff
commitments. While negotiations on the ITO charter proved challenging, the GATT negotiations
progressed more smoothly.
Due to concerns about disrupting world trade patterns and expiring legislative authority, the
decision was made to implement the GATT separately from the ITO. This led to the provisional
application of the GATT through the Protocol of Provisional Application (PPA), signed by eight
of the negotiating countries initially and eventually agreed upon by all 23 participating countries.

The PPA allowed for the provisional application of Parts I and III of the GATT 1947, with
certain provisions of Part II being applied to the fullest extent not inconsistent with existing
legislation. This approach accommodated domestic legislative requirements while establishing a
nascent international trade order.

Despite efforts to establish the ITO, it never entered into force due to lack of approval,
particularly from the United States, which eventually abandoned its pursuit in 1951. Nonetheless,
the GATT remained significant, shaping the international trade regime and providing the basis
for many rules in the World Trade Organization (WTO) agreements.

Overall, the GATT's provisional application marked a pivotal moment in the development of
international trade governance, setting the stage for the modern multilateral trading system.

Guiding principles of GATT

The objective of GATT was to establish an orderly framework for the reduction of trade barriers
which would lead to the expansion of international trade. The GATT in this regard contained
certain underlying principles which guided its application listed as follows:

i. Non-discrimination: the Most Favored Nation (MFN) principle

The MFN principle stated that each contracting party to the GATT was required to provide all
other contracting parties with the same conditions of trade as the most favourable terms it
extended, i.e., each contracting party was required to treat all contracting parties in the same way
that it treats its "most favored nation".

ii. Reciprocity
The principle of reciprocity mandated that the benefits of any bilateral agreements between
contracting parties, regarding tariff reductions and market access, must be extended
simultaneously to all other contracting parties. The principle of reciprocity is closely associated
with the MFN principle.

iii. Tariff reduction

The reciprocal reduction of tariffs was a strong principle reflected in the GATT. Protectionism at
the time mainly consisted of tariffs, and negotiations were also naturally focused on the same.
The text of the 1947 GATT lays out the obligations of the contracting parties in this regard.

The GATT treaty did not provide for a formal institution, but a small GATT Secretariat, with a
limited institutional apparatus, which was eventually headquartered in Geneva to administer
various problems and complaints that might arise among members. The nature of GATT 1947
was that it was viewed as an agreement aimed at addressing most trade concerns of its members,
although it was a long way off from becoming an international institution for trade. There were
very few institutional features in the GATT 1947.7 However, during its subsequent rounds of
negotiations, the GATT ventured into rule-making on Non-Tariff Barriers which lent it a more
institutional and expansive character, and ultimately it became a de facto institution.
THE PRINCIPLE OF NON-
DISCRIMINATION IN THE GATT 1994
The principle of non-discrimination, or, in other words, the requirement not to treat less
favourably all “like” products, irrespective of their origin or whether they are imported or
domestic, is the cornerstone of the WTO multilateral trading system. The non-discrimination
obligation contributes to ensuring fair and predictable international trade relations.

The principle of non-discrimination in international trade is two-faceted:

 the most-favoured-nation treatment obligation and,

 the national treatment obligation

Article I:1 of the GATT 1994 : The Most-Favoured-Nation Treatment Obligation

The most-favoured-nation treatment obligation, widely known as the MFN treatment obligation,
requires WTO Members not to discriminate between products originating in or destined for
different countries. In simple terms, Country A should, for example, treat equally, or not
discriminate between a product originating in Country B and a “like” product originating in
Country C.

The clause relates to providing the same benefit and concession to one Member, in case benefits
and concessions are provided to another Member. MFN hence calls for nondiscrimination
amongst Members inter-se; so for example, in case a country „A‟ provides a tariff concession to
a country „B‟ by imposing a 10% duty on import of cars, „A‟ is obligated to charge the same
rate of 10% to the imports of cars by Country „C‟. In this sense, a nation is bound to treat every
other nation as its favorite or most avored nation. Thus, with respect to the GATT, a Contracting
Party is expected to treat every other Contracting Party as its favorite nation.

Discrimination in goods

By discrimination, we mean that discrimination that is either spelt out by law (de jure) or is
implicit in the type of measures used (de facto). Hence, when foreign goods and services are not
given the same treatment as domestic goods or services or that which is given to other Members;
despite of being similar or like, it is a case of discrimination. Or there may be a variable tax rate
on beverages with high alcohol content than those with low alcohol content. There being no real
discrimination apparent in such a measure, it will be regarded as de facto discrimination if, based
on the market scenario, domestic beverages have a low alcohol content and imported beverages
have a higher content.

Discrimination must hence operate so as to distort the „conditions of competition‟ between

goods and services that are like. Mere existence of different rule, does not lead us to the
conclusion that like goods and services have been discriminated unless the „conditions of
competition‟ have been adversely impacted.

Most Favored Nation Obligations under the GATT, 1947:

Article I of the GATT, 1947 that invokes the principle of most-favored nation treatment prohibits
discrimination that may be in eh form of de facto and de jure discrimination, against the
Contracting Parties inter se. It provides for non-discrimination amongst trading partners; and
applies to every governmental measure in the form of customs duties and charges, the method of
levying the same and the rules and formalities applicable in the importation and exportation of
goods.

Article 1 of the GATT additionally calls for non-discrimination amongst Members inter-se in the
importation of products that are „like‟.

Article 1: 1 hence states that

“… any advantage, favor, privilege or immunity granted by any Member to any product
originated in or destined for any other country shall be accorded immediately and
unconditionally to the like product originated in or destined for the territories of other Members”

Having understood that any form of discrimination is prohibited by virtue of Article I of the
GATT 1947, the MFN principle entails to:

i. any advantage, favor, privilege or immunity granted by any Member

ii. to any product originated in or destined for any other country
iii. shall be accorded immediately and unconditionally
 iv. to the like product
v. originated in or destined for the territories of other Members

the scope of the MFN clause is application to conduct by means of a government imposed
measure which is discriminatory. As a result of prohibiting any conduct which has a
consequence of being discriminatory by nature, Article I: 1 covers even measures that are
discriminatory on exports and imports. In other words, in the event a Contracting Party applies a
measure by means of an advantage, favor, privilege or immunity on either the importation or the
exportation of a product; and such measure is discriminatory, it would attract the scope of Article
I:1 of the GATT, 1947. For instance, if India, a Contracting Party to the GATT, 1947 applies an
additional customs duty on mangoes, but only if these mangoes are exported to the European
Union (another Contracting Party to the GATT); because India aims at curbing the exportation of
these mangoes in order to increase domestic consumption of the same, and because EU is the
largest importer of mangoes. According to the provisions of the GATT, India‟s measure
mentioned above is violative because it did not ban the export of mangoes on the whole, i.e. to
every nation importing mangoes. On the contrary, India merely banned the fruit when the
destination was E.U. In this respect, any advantage, etc. provided to one Contracting Party must
be given unconditionally and immediately to all other Contracting Parties.

Article I:1 of the GATT 1994 sets out a three-tier test. In order to determine whether or not there
is a violation of the MFN treatment obligation of Article I:1, three questions need to be
answered.

 First, does the measure at issue confer an “advantage” upon the products originating in or
destined for the territories of all other Members?
 Second, are the products concerned “like”?
 Third, was the advantage at issue granted “immediately and unconditionally” to all like
products concerned?

Types of measures covered under Article I: 1:

The principle of most-favored nation under Article I: 1 of the GATT covers the following types
of governmental measures:
  With respect to customs duties and charges of any kind (for example, transport or
warehouse charges) which are requisite for free and fair trade; and such type of customs
duty or charge must be imposed on or in applied in connection with the importation and
exportation of products;
 The charge imposed on the internal transfer of payments for imports or exports. Hence,
suppose a Member charges a different exchange rate or service charge on the importation
or exportation of goods only for a particular WTO Member in a discriminatory manner,
the measure is in violation of Article I: 1.
 The method of levying such duties and charges. This measure refers to the method used
to calculate the duties and charges; and in turn refers to the application of ad voleram
versus specific duties. Accordingly, if a WTO Member applies ad voleram duties on the
(like) products imported or exported to some Members, while imposing specific duties
on similar products; the same would be considered as a different method of levying
duties and charges.
 Other rules and formalities in connection with importation and exportation: this means
that rules and formalities with respect to importation and exportation of like products
must be uniform for all Members so as to maintain a level playing field.
 Measures referred to in Article III: 4 of the GATT, 1947; with respect to all laws,
regulations and requirements affecting their internal sale, offering for sale, purchase,
transportation, distribution or use must also be uniform for like products from goods
destined to or coming from another Member‟s territory.

Product must belong to a WTO Member:

According to Article I:1, any advantage, etc. provided to any country, must be extended
immediately and unconditionally to all the other WTO members. This has various implications.

 Firstly, the advantage, favor, etc. must be extended to any country. Thus, such country
who receives the advantage, etc need not be a WTO Member; and may still receive the
favorable treatment by another WTO Member.
 Secondly, such favorable treatment must be extended to all other WTO Members; and
  Thirdly, not only should such favorable treatment be extended to all other WTO
Members, but must also be done immediately and unconditionally.
 the advantage, favor, etc. extended to member country need not to be extended to non
members.

Product must be a “like” product:

In order to prove that the principle of MFN has been violated, the aggrieved party must first
prove that the products are „like‟. The concept of “like products” is also found in numerous
other articles of the GATT 1994, namely, Articles II:2(a), III:2, III:4, VI:1(a), IX:1, XI:2(c),
XIII:1, XVI:4 and XIX:1. However, the concept of “like products” is not defined anywhere in
the GATT 1994. The meaning of this concept has been examined in a number of GATT and
WTO reports. It is generally accepted though that the concept of “like products” has different
meanings depending on the context in which it is found.

The jurisprudence of the concept of „likeness‟ evolved in the case of Border Tax Adjustment
wherein the Panel laid down the guidelines to determine „like‟ goods by following four general
criteria:

i. the property, nature and quality of the products;

ii. the end uses of the product;
iii. consumer tastes and habits and
iv. tariff classification of the products.

Hence, the physical properties, the extent to which the product may be perceived as serving the
same end use, the extent to which consumers perceive and treat the products as an alternative and
the international classification of the products for tariff purposes is what ought to be taken into
account.

# The Japan-Alcoholic Beverages case

The Japan-Alcoholic Beverages case is also known for its jurisprudence on the concept of “like
products”. The question before the Panel in this case was whether „vodka‟ and the Japanese
drink „sochu‟ were alike. While Japan argued that the two shared no similarities, the Panel in its
report (which was later upheld by the Appellate Body) stated that the two should be regarded as
alike due to the fact that the two shared the same physical characteristics and even the same end-
use. The differences in the same simply lie in the fact that the process of filtration is not the
same. In elaboration, the Panel gave a comparison of other alcoholic beverages like „rum‟ to
sochu, stating that the two cannot be considered as „like‟ products because of the difference in
the ingredients, while „whiskey‟ and „brandy‟ had different appearances to that of „sochu‟. At
the same time, „gin‟ „genever‟ and „liqueurs‟ contained certain addictives. To this extent, vodka
and sochu must be considered as like products given the fact that they are similar in appearances
and even have identical end-uses. There were however, no clear guidelines as to the
circumstances in which goods may be considered as „like.‟

# Spain – Unroasted Coffee case

In Spain – Unroasted Coffee, the issue before the Panel was whether different types of unroasted
coffee were “like” within the meaning of Article I:1 of the GATT 1994. The Panel considered
the characteristics of the products, their end-use and tariff regimes of other Members.

The Panel examined all arguments that had been advanced during the proceedings for the
justification of a different tariff treatment for various groups and types of unroasted coffee. It
noted that these arguments mainly related to organoleptic differences resulting from
geographical factors, cultivation methods, the processing of the bean, and the genetic factor. The
Panel did not consider that such differences were sufficient reason to allow for a different tariff
treatment. It pointed out that it was not unusual in the case of agricultural products that the taste
and aroma of the end-product would differ because of one or several of the above-mentioned
factors.

The Panel furthermore found relevant to its examination of the matter that unroasted coffee was
mainly, if not exclusively, sold in the form of blends, combining various types of coffee, and that
coffee in its end-use, was universally regarded as a well-defined and single product intended for
drinking.

The Panel noted that no other contracting party applied its tariff regime in respect of unroasted,
non-decaffeinated coffee in such a way that different types of coffee were subject to different
tariff rates. In the light of the foregoing, the Panel concluded that unroasted, non decaffeinated
coffee beans listed in the Spanish Customs Tariff … should be considered as “like products”
within the meaning of Article I:1.

Hence, products that are „like‟ must be treated equally, irrespective of their origin.
Considerations in determining „like‟ products are essentially the same in case of the MFN clause
as well. Discrimination among „like‟ goods arises when goods that are otherwise similar are
discriminated by governmental measures.

# EC- Bananas case

In EC- Bananas, the issues revolved around the banana‟s import regime of the EC. The EC
identified three types of bananas. The first were EC bananas: which were originating in the EC
and received a duty free treatment. The second type was ACP bananas which originated in
Africa, Caribbean and Pacific: which were known as traditional bananas (due to its traditional
supply of bananas to the EC). ACP bananas also received duty free treatment, but were subject to
a quota that specified the respective shares of 12 countries in the ACP. The third type was that of
non-traditional bananas: wherein the bananas were imported by ACP countries (including the 12
countries mentioned above); but exceeded the shares allotted to these countries. The third type of
bananas also involved imports from other nations; and required additional qualifications than that
applicable to ACP countries. The Appellate Body noted that “the essence of the non
discrimination obligations is that like products are treated equally, irrespective of their origin…”
The Appellate Body further clarified that the obligation of non-discrimination may be waived in
case of existence of Customs Unions or Free Trade Areas approved by Article XXIV of the
GATT.„Like‟ products are hence discriminated against when governmental measures either in
the form of customs duties and charges, or the method of levying the same or the rules and
regulations thereof so operate to discriminate between the two products rather than between two
countries.

With reference to the MFN principle addressed in the GATT, the difference between the scope of
discrimination in Article III (providing for the national treatment obligation) and Article I
(providing for the MFN obligation) must be thoroughly understood. While both the national
treatment and the most favored nation treatment make certain to eliminate measures that are both
de jure and de facto discriminatory; the national treatment obligation is applicable to merely
internal measures that are in the form of taxes, charges and governmental regulations. The
National treatment clause is also invoked only when imports of „like‟ products of a Member are
not treated in the same manner as that of domestic „like‟ products. The MFN clause, on the other
hand is broader a provision due to the fact that it covers all forms of government measures,
including measures in the form of border measures. 5 Secondly, the MFN principle is also
broader in its application due to its application to both exports and imports6 ; making it the true
cornerstone of GATT.

Advantage Accorded “Immediately and Unconditionally”

Article I:1 of the GATT 1994 requires that any advantage granted by a WTO Member to any
country must be accorded “immediately and unconditionally” to all other WTO Members. This
means that once a WTO Member has granted an advantage to a country, it cannot impose
conditions on other WTO Members for them to benefit from that same advantage. The WTO
Member must extend the benefit of the advantage to all WTO Members unconditionally

# In Canada – Autos

In Indonesia – Autos, the Panel found that under the Indonesia car programmes, customs duty
and tax benefits were conditional on achieving a certain local content value for the finished car.
The Panel concluded that these conditions were inconsistent with the provisions of Article I:1
which provides that tax and customs duty advantages accorded to products of one Member (in
that case, on products from the Republic of Korea) be accorded to imported like products from
other Members “immediately and unconditionally”.

In Canada – Autos, the Appellate Body found:

The measure maintained by Canada accords the import duty exemption to certain motor vehicles
entering Canada from certain countries. These privileged motor vehicles are imported by a
limited number of designated manufacturers who are required to meet certain performance
conditions. In practice, this measure does not accord the same import duty exemption
immediately and unconditionally to like motor vehicles of all other Members, as required under
Article I:1 of the GATT 1994. The advantage of the import duty exemption is accorded to some
motor vehicles originating in certain countries without being accorded to like motor vehicles
from all other Members. Accordingly, we find that this measure is not consistent with Canada’s
obligations under Article I:1 of the GATT 1994.
Article III of the GATT 1994: National Treatment Obligation

The principle of national treatment is expressed in Article III of the GATT, 1947 and is one of
the core principles of the GATT and the international trade regime. Like the term suggests, the
principle endeavors to provide equal treatment to goods that originate or are being exported by
foreign countries, and “like” domestic goods. Against this backdrop, it would be pertinent to note
that where on the one hand, the principle of most favored nation endeavors to provide equal
treatment to “like” products or goods belonging to Member nations inter se; the principle of
national treatment delves to provide equal treatment to “like” goods of foreign nations vis-àvis
domestic goods. In this respect, the principle of national treatment seems to have a larger bearing
on international trade regulation simply due to the fact that nations are more likely to
discriminate against foreign goods vis-à-vis their own goods; than discriminate between foreign
goods inter se. in other words, the Article III of the GATT imposes an obligation on the
Members to provide equal treatment to foreign Member nations, as far as “like” products are
concerned; and thus not “afford protection to domestic production.”

Significance of the National Treatment Provision:

The principle of National Treatment endeavors to prohibit discrimination (both de jure1 and de
facto2) between domestic and imported goods and services that are like.

Article III of the GATT, 1947 aims and endeavors to achieve the following:

 It seeks to promote the conditions of competition between countries. In the Japan –

Alcoholic Beverages Case, the Appellate body held that “the fundamental purpose of the
Principle of national treatment is to prevent protectionism in the application of internal
tax and regulatory measures.” 3 National treatment entails to improve the conditions of
competition in the market, and any protectionism afforded to imported production shall
directly hamper the conditions of competition. Prejudices against goods that are not
locally made are considered to be unfair trade practices; with the principle of national
treatment ensuring that free trade is fair and fair trade is free.
 It seeks to ensure that imported goods are not subjected to any discrimination in the
country of importation by way of measures either in the form of internal taxes or internal
 charges and laws, regulations and requirements…is not applied in such a manner so as to
afford protection to domestic production.
 The purpose of Article III:1 is to ensure that such internal measures should “not be
applied to imported or domestic products so as to afford protection to domestic
production (Article III:1)” Article III obliges Members of the WTO to provide equality of
competitive conditions for imported products in relation to domestic products (Japan –
Alcoholic Beverages II, Korea – Alcoholic Beverages)

Hence, national treatment ensures that imported goods will be afforded the same treatment as
domestic goods in matters that are under the control of the government.

Paragraph 1 of Article III

Paragraph 1 of Article III, generally specifies that internal tax, internal charges and laws,
regulations and requirements for the sale and purchase, transportation or distribution of imported
goods must not be applied in a manner that It results in affording protection to domestic like
products.

“The [Members] recognize that internal taxes and other internal charges,
and laws, regulations and requirements affecting the internal sale, offering
for sale, purchase, transportation, distribution or use of products, and
internal quantitative regulations requiring the mixture, 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.”*

The remaining paragraphs of Article III thereinafter provide a detailed explanation of the
application of the principle with respect to individual aspects such as internal taxes and charges;
laws, regulations and requirements; and lastly purchase sale, transportation and distribution of
imported goods. paragraph I sets out the general treatment towards imported goods with respect
to internal taxes and internal charges; laws, regulation; transportation, sale, purchase; so on and
so forth.

Internal Taxes and Internal Charges

It is important to note that GATT which is now a part of the WTO is applicable to merely
governmental measures. Hence, private measures or measures applied by private persons do not
fall within the purview of the GATT. Accordingly, the terms internal taxes and internal charges
refer to the taxes and charges applied by means of a governmental measure once the goods in
question have crossed the boundary and entered the jurisdiction of the importing nation.
Therefore, internal taxes refer to the taxes applied once the imported goods have entered the
boundary of the importing nation; and taxes need to be levied for the sale of the good. For
instance, applied taxes, specific taxes and ad voleram taxes are common examples of internal
taxes. At the same time, service tax and value added tax or VAT is also a common example of
taxes. On the other hand, internal charges are the charges applied for the sale, purchase,
transportation or storage of the imported good in the jurisdiction of the importing nation. Article
III:2 of the GATT 1994 specifically concerns internal taxation, while Article III:4 deals with
internal regulations. A further distinction needs be drawn.

Paragraph 2 of Article III

With the intent of truly reducing and removing tariff and non-tariff barriers to trade, the principle
of national treatment, as seen above is keen to ensure that goods are given the same treatment as
that of „like‟ goods in the domestic market; i.e. the country of importation.

“The products of the territory of any [Member] imported into the territory
of any other [Member] 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. Moreover, no [Member]
shall otherwise apply internal taxes or other internal charges to imported or
domestic products in a manner contrary to the principles set forth in
paragraph 1”.*

In particular, the GATT aims at providing equality to imported and domestically produced
goods. The principle of National Treatment set forth in Article III of the Agreement forming the
GATT, states that internal taxes and internal charges
  shall not be so applied on imported products so as to be in excess, directly or indirectly,
of domestic products;
 and to afford protection to „like‟ domestic goods.

Consequently, Article III: 2 which pertain to the application of the principle of national treatment
with respect to internal taxes and charges are divided into two parts.

In Article III:2, the non-discrimination obligation regarding internal taxation applies not only to
“like products” (first sentence), but also to “directly competitive or substitutable products”
(second sentence). In contrast, the non-discrimination obligation regarding internal regulations in
Article III:4 applies only to “like products”.

First part/sentence of Paragraph 2 of Article III

“The products of the territory of any [Member] imported into the territory
of any other [Member] 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”.

According to the first part of paragraph 2, two points need to be significantly kept in mind while
applying the provisions of Article III: 2

i. Product of one member country is being imported in other member country

ii. Product must be a “like” product
iii. Taxes or internal charges must not be charged in excess to that applicable in domestic
territory of that member.

Product must be a “like” product:

The principle of National Treatment set in Article III of the GATT is applicable when the
discriminatory conduct in question is towards goods that are alike. In other words, a Member
nation is permitted to provide different treatment to unlike or dissimilar products. The concept of
“like” products with reference to the principle of national treatment set in Article III of the GATT,
1947 is similar to that in the most favored nation treatment set in Article I of the GATT
With respect to the concept of like products referred to in Article III: 2 of the GATT, 1947; the #
Japan-Alcoholics Beverage dispute best illustrates the same. The Panel in this dispute was of
the view that despite the fact that vodka and sochu had different alcoholic strengths, it did not
necessarily mean that the two would have been dissimilar products. For this matter, it even
examined that the Japanese Schedule of Concessions had classified both vodka and sochu within
the same heading. The Panel re-called the criteria laid down in the Panel Report of the Border
Tax Adjustment dispute; namely, a) the property, nature and quality of the products; b) the end
uses of the product; c) consumer tastes and habits and d) tariff classification of the products.
Hence, the physical properties, the extent to which the product may be perceived as serving the
same end use, the extent to which consumers perceive and treat the products as an alternative and
the international classification of the products for tariff purposes is what ought to be taken into
account.

the Panel in its Report (which was later upheld by the Appellate Body) stated that the two should
be regarded as alike due to the fact that the two shared the same physical characteristics and even
the same end-use. The differences in the same simply lie in the fact that the process of filtration
is not the same. In elaboration, the Panel gave a comparison of other alcoholic beverages like
„rum‟ to sochu, stating that the two cannot be considered as „like‟ products because of the
difference in the ingredients, while „whiskey‟ and „brandy‟ had different appearances to that of
„sochu‟. At the same time, „gin‟ „genever‟ and „liqueurs‟ contained certain addictives. To this
extent, vodka and sochu must be considered as like products given the fact that they are similar
in appearances and even have identical end-uses. There were however, no clear guidelines as to
the circumstances in which goods may be considered as „like.‟

Imported products being internally taxed or internally charged “in excess” of domestic
products

While ensuring that internal taxes or internal charges are not applied in excess, the principle of
National Treatment in GATT ensures that even the slightest difference in the amount of taxes
makes the measure illegal. The exception of de minimus hence is not a valid exception to the
principle. Internal taxes and internal charges, on the other hand must be different than that
applied to similar goods.
For this purpose, the Panel in # Japan-Alcoholics Beverage dispute examined whether vodka
had been charged in excess of that in comparison to the Japanese local drink named sochu. The
Panel held that despite the fact that the two products in question had been ascertained to be like
products, vodka which was an imported product was been taxed at 9,927 Yen per degree of
alcohol; whereas sochu was being taxed at merely 6,228 Yen per degree of alcohol. Accordingly,
the Panel Report (subsequently agreed to by the Appellate Body Report) held that vodka had
been taxed in excess of in comparison to sochu.

Second part of Paragraph 2 of Article III

Apart from restraining the application of excess internal taxes and duties towards imported like
products, no Contracting Party must additionally apply internal taxes or other internal charges to
imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

“Moreover, no [Member] shall otherwise apply internal taxes or other

internal charges to imported or domestic products in a manner contrary to
the principles set forth in paragraph 1.”*

In other words, two criteria must be satisfied:

i. The internal tax or internal charge must not be in excess of that applicable to like
domestic goods; and,
ii. These internal taxes and charges must not be applied in a manner that distort conditions
of competition and consequently afford protection to domestic products.

This means that even when a Contracting Party has satisfactorily fulfilled the first criteria; it
must in addition successfully prove that the internal taxes or internal charges have not been
applied in a manner that would distort the competition in favor of the domestic production. To
this effect, the Panel in # Argentina-Hides and Leather noted that the intention of Article III: 1
(first sentence) is not to directly impact internal taxes or charges directly as policy measures; but
rather ensure that their operation does not in any manner have a negative impact on competition
between domestic and imported products.

# The US – Automobiles dispute

The US – Automobiles dispute aptly elucidates this second factor; namely whether internal taxes
and internal charges have been applied to distort conditions of competition and afford protection
to like domestic products.

The question before the Panel in the above mentioned dispute was whether certain products that
were being imported to the United States which were above USD 30,000 were in any manner
different to those being sold below USD 30,000 in order to be considered as luxury products; and
hence be subject to a different and higher tax.

Consequently, it was important to decide whether the automobiles that fell in the former category
were “like” or similar to the automobiles that fell in the latter category; and if so, was the
difference in the taxes in order to afford protection to the domestic industry.

In the concerned dispute, E.U. alleged that the U.S. was taxing certain luxurious products such as
boats, aero planes, fur and the like, sold above the threshold limit of USD 30,000 at 10% in
excess of the retail price; and that such products were similar to or like products being sold under
the said amount. For this purpose, the Panel was left with two primary questions to answer:

i. Are the products like or similar?; and

ii. Are the like products being treated differently in order to afford protection to the
domestic industry?

For the purpose of determining the answer to the first question, the Panel referred to the criteria
laid down in the Border Tax Adjustment dispute (discussed above). Therefore, the end uses,
common features and physical characteristics must be taken into account of while determining if
the products in question are alike or similar.

Once it has been determined that the products are similar, it must be ascertained whether the said
products have been subject to an internal tax or internal charge that has been in excess of that
being charged with respect to domestic products. In addition, like the second sentence of Article
III: 2 mentions, the Panel and Appellate Body are left to determine if and whether this excess
tax/charge has been imposed for the purpose of affording protection to the domestic industry.

Against this backdrop, Article III: 2 makes it requisite to read the same in light of paragraph 1
which sets out the purpose of the Article. Consequently, the Panel noted that paragraph 2 of
Article III aims at preventing the parties from imposing internal taxes or internal charges that are
in excess of those imposed for domestic like products; and the reason for imposing such excess
taxes/charges is to afford protection to the domestic industry. In a related vein, the Panel noted
that the aim and intention of the parties must be taken into account of. Hence once it has been
established that the aim of the party was to afford protection to domestic industry, it must
additionally be established that the intention was to distort conditions of competition in favor of
the domestic industry.

For the purpose of the US-Taxes on Automobiles dispute, the Panel held that the U.S. conduct of
imposing a higher tax for luxury products above USD 30,000 did not violate Article III: 2 simply
because U.S. did not impose a higher tax in order to afford protection to domestic productions
and consequently distort conditions of competition in the domestic market.

The Panel additionally noted that the U.S. itself was selling a large number of products that fell
outside the threshold limit of USD 30,000; and additionally E.U. also had enough opportunity to
export products under the threshold limit. For the same reason, the Panel held that the U.S. had
not violated rticle III: 2 as it did not classify the products for the purpose of affording protection
and distorting the conditions of competition; according to the aims and intent test.

It is important to note at this juncture that the Appellate Body in the Japan-Alcoholic Beverages
dispute disregarded the aims and intent test set out in the U.S.-Automobile dispute. What the
Appellate Body regarded however was that Members are not permitted to impose internal taxes
and internal charges that are not only in excess of those imposed on domestic products; but also
for the purpose of affording protection to the domestic production.

The concept of “like” products vis-à-vis “directly competitive or substitutable products”:

The concept of like products has been discussed in detail, and the criteria for the determination
of like products was first laid down in the Border Tax Adjustments dispute; and has been
referred to relentlessly by subsequent Panels for the determination of like products.

For the purpose of determining “like” products, the criterion has therefore remained constant for
both the Most Favored Nation Treatment and the National Treatment principles.
The first sentence of Article III: 2 (discussed above) is applicable only when the discrimination
in question by means of an internal tax or internal charge is between goods that are imported and
domestic; and such goods are alike. In other words, the first sentence of paragraph two is
restricted to like products. On the other hand, the second sentence of Article III: 2 pertains to
directly competitive or substitutable products.

In a related vein, while the second sentence states that apart from restraining the application of
excess internal taxes and duties towards imported like products,

“―… No Contracting Party must additionally apply internal taxes or other

internal charges to imported or domestic products in a manner contrary to
the principles set forth in paragraph 1 (i.e. to afford protection to domestic
products).”

Accordingly, as mentioned in the previous section, the principle of national treatment of the
GATT entails equal that not only should:

i. Internal taxes and charges be the same for imported and domestic products that are
similar;
ii. And the manner of applying the same (for example the method of calculation) be in such
a way that the domestic industry for such similar or like products does not distort the
competition in its favor. It thus creates a level playing field for imported vis-à-vis
domestic like products.

Nevertheless, the second sentence of paragraph two is wider in scope, given its applicability
towards not only “like” products, but additionally also products that may not be like, but would
be considered as directly competitive or substitutable to the domestic product. Against this
backdrop, the Ad Note to Article III: 2 provides that,

“―A tax conforming to the requirements of the first sentence of paragraph

2 would be considered to be inconsistent with the provisions of the second
sentence only in cases where competition was involved between, on the one
hand, the taxed product and, on the other hand, a directly competitive or
substitutable product which was not similarly taxed.”
The Ad Note to paragraph two therefore makes it clear that:

 An internal tax of a certain Member or Contracting Party of the GATT may be the same
(and not in excess of) for both imported and domestic like products (in accordance to the
first sentence of paragraph two).
 Nevertheless, the said internal tax may still be inconsistent with paragraph two (the
second sentence) when the manner of applying the internal tax is such that it would
distort conditions of competition between goods that are not merely like: but also
directly competitive or substitutable.

This connotes that the second sentence of paragraph two is certainly wider in scope, given the
application of the Ad Note mentioned above. Consequently, one must understand the true
difference between products that are alike and products that are not alike, but on the contrary
directly competitive or substitutable.

the directly competitive or substitutable products:

In the previous section, we examined how products that are like must be similar in all respects.
Hence, they must have similar end-uses; or the physical characteristics must be the same; or the
likeness may be adjudged from consumer preferences. Against this backdrop, vodka and sochu
were adjudged by the Panel and the Appellate Body to be similar, in the Japan-Alcoholic
Beverages dispute. The two products were primarily similar because they physical characteristics
were similar: the two being while, clean spirits. On the contrary, whiskey, gin and genever were
considered as unlike: but directly competitive or substitutable products. In this dispute, the Panel
and Appellate Body held that whiskey, gin and genever were primarily different given the use of
addictives (in gin and genever vis-à-vis sochu), the color (whiskey versus sochu) and the
difference in ingredients (in rum and sochu). However, the Panel and Appellate Body clarified
that despite these alcoholic beverages being dissimilar, they were certainly directly competitive
or substitutable.

Against this backdrop, the Panel in # the Japan-Alcoholic case emphasized that besides the
physical characteristics, common end uses and tariff classifications; the „market place‟ and
„elasticity of substitution‟ must also be identified before goods are considered as “directly
competitive or substitutable.” Imported goods that are „like‟ or “directly competitive or
substitutable” are said to be discriminated against only when they are not similarly taxed as their
domestic counterparts. The rationale, behind this dissimilar taxation should then be proved to be
applied in such a manner so as to afford protection and hamper competitive conditions in the
market.

# The Chile- Alcoholic Beverages case best illustrates the same. In this case, a certain Chilean
tax measure that increased the tax rate along with the increase in alcohol content was scrutinized.
The tax rate increased by 4% with every degree in the increase of alcohol content; the minimum
being less than or equal to 35 degree charged with 27% tax ad volerem. The Panel in this case
found that approximately 75% of the domestic production had an alcohol content of less than 35
degree; therefore being charged at the lowest of 27%, and that the majority of the imported
beverages had an alcoholic content of 39% which was liable to a tax rate of 47%, thus being the
highest. The Panel, in this case found that imported beverages were “directly competitive or
substitutable” with that of domestic beverages and that the tax measures of Chile were with a
view to afford protection to domestic goods and thereby distort competition in the market.

# In the Korea- Alcohol case, the Panel noted that product categories must not be so narrowly
construed so as to defeat the purpose of non-discrimination provided in Article III. Apples and
oranges could hence be regarded as “directly competitive or substitutable”; as illustrated by the
Geneva session of the Preparatory Committee

Paragraph 4 of Article III

its bearing to Regulatory Measures in the form of laws, requirements and regulations:

Paragraph four pertains to providing a level playing field and equal competitive conditions as far
as regulatory measures by means of laws, requirements and regulations are concerned. In other
words, the GATT prohibits Contracting Parties from enacting laws, regulations, requirements
and other regulatory measures that distort conditions of competition in favor of the domestic
industry.
the principle of national treatment also encompasses regulatory measures that are governmental
in nature by way of laws, regulations and other requirements that affect internal sale, offering for
sale, purchase, transportation, distribution or use of imported goods that accords less favorable
treatment to imported products than „like‟ domestic products. Hence, any form of government
action that seeks to provide protectionism to domestic goods over imported goods, violate the
principle of national treatment

In essence principle of National Treatment with respect to laws, regulations and requirements
requires;

 Products must be alike

 must be imported from a Contracting Party
 Must be subject to treatment no less favorable to like domestic products

# The US- Gasoline dispute

The US- Gasoline dispute was the first dispute before the WTO Dispute Settlement Body after
the coming into birth of the WTO.20 Apart from various other questions before the Panel, the
latter was also requested to decide whether the US measure had violated Article III: 4; in a
dispute brought before the DSU by Venezuela and Brazil. The law under dispute in this case was
the US Clean Air Act, 1963; that aimed at controlling pollution and thus improving the
environment. For this purpose, the Act segregated the areas, and identified nine areas that had
severe pollution. Consequently, it directed that only “reformulated gasoline” could be sold in
these localities. In localities that did not face such high pollution levels, “conventional gasoline”
could continue to be sold. However, for the purpose of selling the latter, the producers had to
ensure that it was as clean as it was in the year 1990. To that end, the year 1990 was the baseline,
to which both conventional and reformulated gasoline was supposed to be compared to in the
future. For the purpose of comparison, a domestic refiner that operated for a minimum period of
six months in the year 1990 was permitted to establish a refinery baseline to produce gasoline
similar to that in the year 1990. Consequently, such a refiner was permitted to use any of the
methods, namely:

i. Using the quality and volume of gasoline produced in 1990; or

ii. The data of the blendstocks and records of the gasoline in 1990; in the event that confirming
to the first method is impractical and unachievable; or

iii. The data on the quality of the blendstocks of gasoline post 1990; and this data may be used
only when confirming to any of the above two methods is impractical for the refiner.

The issue:

The issue pertaining to the method of assigning a refiner according to the abovementioned
methods was under dispute. In other words, according to the Clean Air Act and the methods it
identified; an importer of gasoline was only permitted to use the first method, namely use of the
data on the quality and volume of gasoline produced in 1990. On the other hand, domestic
producers were permitted to use any of the three methods. Consequently, Venezuela and Brazil
urged that the Clean Air Act had violated the principle of national treatment because it imposed
different and more stringent conditions for foreign producers. As a result, foreign producers
interested in exporting gasoline to the United States were required to make expensive changes to
their refineries in order to comply with the first method. Venezuela and Brazil therefore alleged
that not only did the U.S. violate Paragraph 4 of Article III, but also did so in order to afford
protection to the domestic producers: thereby violating Article III: 1 as well.23

The findings of the Panel:

The Panel held that the U.S. had violated both Article III: 1 and III: 4, mainly because the
methods identified for setting up a refinery were not the same for domestic producers and
importers of gasoline. Hence, by permitting importers to only use the first method (i.e. the use of
the data of the volume of gasoline in 1990), the Act had violated the principle of national
treatment by according treatment that was less favorable to importers of a like product. For this
purpose, the Panel referred to the criterion used to identify like product in the Border Tax
Adjustment dispute and Japan Alcoholics Beverage dispute. Consequently, the Panel noted that
imported and domestic gasoline as similar in physical characteristics and its end uses. In
addition, the Clean Air Act was a law by virtue of Article III: 4 and created certain rules that
required to be followed; failing which defaulters would face a penalty. To this end, the Panel
requested the U.S. to bring its law in conformity with the international obligations under Article
III: 1 and III: 4
# Korea-Beef case

The violation of Article III: 4 was in question before the Dispute Settlement Body in the Korea-
Beef case. In this dispute, the Panel analyzed a Korean law requiring two retail distribution
systems for the sale of beef, one for imported beef and the other for domestic beef. Accordingly,
a “Specialized Imported Beef Store” can sell only imported beef, while another retailed can sell
only domestic beef. A supermarket may however sell both domestic and imported beef. Post
1990, Korea promulgated a dual retail system, wherein retailers had to choose the type of beef
they desired to sell: domestic or imported. In the result, most retailers preferred to sell domestic
beef, hampering the sale of imported beef. Gradually, a new retail system was incorporated to
provide for the sale of imported beef. The new retail system nevertheless resulted in merely
approximately 5,000 shops selling imported beef as against (approximately) 45,000 shops selling
domestic beef.

The Panel, in this case held that the treatment accorded to imported beef with the introduction of
the dual retail system by the Korean law and regulation, is less favorable than the treatment
given to the like domestic beef; a finding that was upheld by the Appellate Body.
Market Access Principle and Barriers
Barriers to market access

Barriers to market access include tariffs (also referred to as customs duties), quantitative
restrictions (including quotas), other duties and financial charges, and other non-tariff measures,
such as customs procedures, technical regulations, and sanitary and phytosanitary measures. It is
noteworthy that the other non-tariff measures may include internal measures, while tariffs, other
duties and financial charges and quantitative restrictions specifically concern border measures.

I. Tariffs
Tariffs or customs duties are financial charges imposed on goods at the time of and/or because of
their importation. Market access is conditional upon the payment of these customs duties. Tariffs
or customs duties are not prohibited under the GATT 1994. This is in sharp contrast with the
general prohibition on quantitative restrictions in Article XI of the GATT 1994. Tariffs represent
the only instrument of protection generally allowed by the GATT 1994. WTO/GATT law has a
clear preference for customs duties. Article XXVIII bis of the GATT 1994 encourages and calls
upon WTO Members to negotiate the reduction of tariffs

Tariff negotiations is that WTO Members commit themselves to a ceiling on the level of customs
duties that can be applied on certain roducts. In doing so, WTO Members “bind” tariffs for these
products. The bound tariffs constitute “tariff concessions”. Articles II:1(a) and II:1(b) of the
GATT 1994 provide rules regarding the concessions set out in the schedules of concession.

Article II:1(a) stipulates that Members shall accord to the commerce of other Members treatment
no less favourable than that provided for in the appropriate Part of the appropriate Schedule
annexed to this Agreement. Article II:1(b), first sentence, provides that products described in
Part I of the Schedule of any Member shall on importation be exempt from ordinary customs
duties in excess of those set forth and provided in the Schedule. This means that products may
not be subjected to customs duties above the tariff concessions or bindings.

In Argentina – Textiles and Apparel, the Appellate Body found that the application of a type of
duty different from the type provided for in a Member’s Schedule was inconsistent with Article
II:1(b), first sentence, of the GATT 1994, to the extent that it resulted in ordinary customs duties
being levied in excess of those provided for in that Member’s Schedule

II. Non-Tariff Barriers

Many non-tariff barriers apply to domestic and imported products. They include customs
procedures, technical regulations, sanitary and phytosanitary measures, charges equivalent to an
internal tax, anti-dumping and countervailing duties and fees and charges for services actually
rendered

Quantitative restrictions (QRs)

Quantitative restrictions (QRs) are measures which prohibit or restrict the quantity of a product
that may be imported. A typical example of quantitative restrictions would be a measure
allowing the importation of 10,000 widgets only. This quantitative restriction is also referred to
as a quota. A tariff quota, however, is not a quota and is not considered to be a quantitative. A
tariff quota is a quantity which can be imported at a certain duty.

The GATT 1994 sets out a general prohibition of quantitative restrictions. One of the main
objectives of the GATT 1994 is to protect the domestic industry with tariffs only. Article XI:1 of
the GATT 1994 provides:

“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 [Member] on the
importation of any product of the territory of any other [Member] or on the
exportation or sale for export of any product destined for the territory of
any other [Member].”

The only permitted restrictions on trade are duties, taxes and other charges, and not prohibitions,
quotas or licensing.

Quantitative restrictions may be temporarily applied to prevent critical shortages of foodstuffs, to

apply standards for commodities or to any agricultural or fisheries products.
The GATT 1994 provides that quantitative restrictions, such as import bans, for example, when
applied, should be administered on a non-discriminatory basis. Therefore, quantitative
restrictions, when applied, should apply to all trading partners equally. This is the so-called
“similarly restricted” rule. Article XIII:1 of the GATT 1994

Publication and Administration of Trade Regulations

Article X of the GATT 1994 enunciates two general principles. First, trade laws and regulations
may not be enforced before official publication. Second, trade laws and regulations shall be
administered in a uniform, impartial and reasonable manner. All laws and regulations, judicial
decisions and administrative rulings, etc. affecting imports and exports should be published.
They may not be enforced before official publication.

Administration of laws and regulations relating to trade shall be uniform, impartial and
reasonable. Independent judicial, arbitral or administrative instances should be instituted for
recourse for prompt review and correction of action inconsistent with this principle.
Exceptions to the Disciplines in The Gatt
1994
Article XX of GATT is entitled “General Exceptions” and enumerates exception to GATT
principles in the following manner:

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;…

(d) necessary to secure compliance with laws or regulations which are not
inconsistent with the provisions of this Agreement, including those relating
to customs enforcement, the enforcement of monopolies operated under
paragraph 4 of Article II and Article XVII, 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 ondomestic
production or consumption;
The nature of Article XX is such that measures which are otherwise inconsistent with the
provisions of GATT may be justified if they fall within the categories listed in Article XX and
otherwise fulfill the conditions laid down in Article XX. The GATT Panel in US – Section 337
Tariff Act stated that the defense in Article XX(d) is a “limited and conditional” exception to
GATT provisions.3 The GATT Panel used the term “limited” as the list of exceptions in Article
XX is exhaustive and “conditional” because Article XX only provides for the justification of a
GATT-inconsistent measure when the conditions set forth in Article XX are fulfilled.

It is important to note that Article XX can only be invoked by a Member when a measure has already
been found to be inconsistent with another provision of GATT. From the above, it is also appropriate
to characterize Article XX essentially as a balancing provision between trade liberalization, market
access and non-discrimination and societal values and interests.

Article XX carries with it a two-tier test to determine whether a GATT-inconsistent measure can
be justified under any one of its provisions. The test for a measure to be justified under Article
XX is

i. Does the measure at issue come under one of the specific exceptions of sub-clause under
Article XX (paras (a) – (j))?
ii. Does the measure at issue satisfy the requirements of the chapeau of Article XX?

The Appellate Body in US – Shrimp clarified the hierarchical nature of the test; that first, it must
be examined whether the measure falls within one of the categories enumerated by Article XX,
and subsequently, the measure must be tested for conformity with the chapeau of Article XX.

Article XX(b) Measures Necessary to Protect Human, Animal or Plant Life or Health
Article XX(b) sets out a two-tier test to determine whether a measure is justified under that
provision, before examining whether it also satisfies the elements of the chapeau of Article XX.
The party invoking Article XX(b) has to establish:

i. that the policy in respect of the measures for which the provision was invoked falls
within the range of policies designed to protect human, animal or plant life or health;
ii. that the inconsistent measures for which the exception is being invoked are necessary to
fulfil the policy objective
# Thailand – Cigarettes case

in Thailand – Cigarettes, Thailand sought to justify its import restrictions on cigarettes by

saying that it aimed to protect the public from harmful ingredients in imported cigarettes, and to
reduce consumption of cigarettes in Thailand. The Panel acknowledged that smoking constituted
a serious risk to human health and, that consequently, measures designed to reduce consumption
of cigarettes fell within the range of policies considered under Article XX(b).

However, the “necessity” requirement - is more difficult to establish. The Panel in Thailand –
Cigarettes, established that a measure is “necessary” within the meaning of Article XX(b) only
when there are no alternative measures consistent with the GATT, or less inconsistent with it,
which the defending Member could reasonably be expected to employ to achieve its objective. In
the light of this standard, the Panel in Thailand – Cigarettes, conducted the following assessment
of the “necessity” of Thailand’s import restrictions allegedly designed to protect public health.

the Panel considered that there were various measures consistent with the General Agreement
which were reasonably available to Thailand to control the quality and quantity of cigarettes
smoked and which, taken together, could achieve the health policy goals that the Thai
government pursues by restricting the importation of cigarettes inconsistently with Article XI:1.
The Panel found therefore that Thailand’s practice of permitting the sale of domestic cigarettes
while not permitting the importation of foreign cigarettes was an inconsistency with the General
Agreement not ‘necessary’ within the meaning of Article XX(b).155

The chapeau to Article XX

With regard to measures provisionally justified under one of the specific exceptions of Article
XX, the chapeau of Article XX provides:

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,

The chapeau is often the most difficult and controversial requirement to be satisfied in an Article
XX enquiry. In a nutshell, the chapeau to Article XX is an expression of the good faith principle
in international law. The object and purpose of the chapeau to Article XX is to avoid that
provisionally justified measures under a sub-clause to Article XX are applied in such a way as
would constitute a misuse or an abuse of exceptions under Article XX.

“a means of arbitrary or unjustifiable discrimination between countries where the same

conditions prevail”. The Appellate Body decided in US – Shrimp that discrimination may result
when the same measure is applied to countries where different conditions prevail. When a
measure is applied without regard for the difference in conditions between countries and this
measure is applied in a rigid and inflexible manner, the application of the measure may constitute
“arbitrary discrimination” within the meaning of chapeau of Article XX.

Furthermore, a measure also has to satisfy the test “unjustifiable discrimination” under Article
XX. In US- Gasoline, the Appellate Body dealt with the meaning of “unjustifiable
discrimination” and held the measure to have satisfied such a requirement. In arriving at its
decision, the Appellate Body held that the resulting discrimination from the measure must have
been foreseen, and was not merely inadvertent or unavoidable. 29 Therefore, it may be noted
that the Appellate Body emphasized on the deliberate nature of the discrimination. This ruling of
the Appellate Body was also mirrored by the panel in Argentina – Hides and Leather.

“disguised restriction on international trade”. The Appellate Body in US – Gasoline held that the
requirements of “arbitrary or unjustifiable discrimination” and “disguised restriction on international
trade” may read side-by-side as they impart meaning to each other, and “disguised restriction”
includes disguised discrimination.31 The Appellate Body also held that “disguised restriction”
includes restrictions amounting to arbitrary and unjustifiable discrimination in international trade
under the guise of a measure formally within the terms of an exception listed in Article XX. 32 The
panel in EC- Asbestos additionally clarified that a restriction will constitute an abuse if its
compliance is to conceal the pursuit of trade-restrictive objectives. However, bearing in mind the fact
that the aim of the measure may not be easily ascertained, the protective application of a measure can
be discerned from its design, architecture and revealing structure.