IV. Introduction to WTO-Law The WTO at a glance Principles of non-discrimination Rules on Market Access Rules on unfair Trade Exceptions from the WTO-System

1. The WTO at a glance The agreement provides a common institutional framework for the conduct of international trade relations. Contrary to its predecessor the WTO is a permanent organisation which benefits from a legal personality. Objectives of the WTO Raising standards of living Ensuring full employment and a growing volume of real income and effective demand Expanding the production of trade in goods and services Sustainable development and protection of the environment Needs of developing countries Functions of the WTO Facilitate the implementation, administration and operation of the various trade agreements Provide a forum for multilateral trade negotiations Resolve trade disputes (DSB) Review national trade policies (TPRM) Cooperate with IO

Structure of the WTO © www.wto.org

Multilateral agreements on trade in goods: the General Agreement on Tariffs and Trade 1994 ('GATT' 1994) (which included the GATT 1947); the Agreement on Agriculture; the Agreement on the Application of Sanitary and Phytosanitary Measures; the Agreement on Textiles and Clothing; the Agreement on Technical Barriers to Trade; the Agreement on Trade-Related Investment Measures; the Agreement on Anti-Dumping Measures; the Agreement on Customs Valuation; the Agreement on Preshipment Inspection; the Agreement on Rules of Origin; the Agreement on Import Licensing Procedures; the Agreement on Subsidies and Countervailing Measures; the Agreement on Safeguards. Multilateral agreement on Trade in Services (GATS) Multilateral agreement on Trade-Related aspects of Intellectual Property Rights (TRIPS)

General rules (e.g. scope, functions, organisation, accession) Plurilateral Agreements Agreement on Trade in Civil Aircraft Agreement on Government Procurement Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) Mechanism for reviewing the trade policies of WTO members (TPRM) General rules (e.g. scope, functions, organisation, accession) DSU, TPRM TRIPS GATT + special agreements on agriculture, dumping, subsidies GATS Plurilateral agreements: public procurement, civil aircraft

2. Principles of non-discrimination 2.1. Overview Non-discrimination is the key concept of WTO-law and policy: Discriminations are an important contributing cause of economic crises Discrimination breeds resentments among countries, manufacturers, traders, workers and poisons international relations and/or may lead to conflict Discrimination makes no or scant economic sense, since it distorts the markets in favour of products or services that may be more expensive and of a lesser quality. Two main principles of non-discrimination (between and against other countries) concerning trade in goods and services: MFN: most-favoured-nation treatment obligation (2.2.) National treatment obligation (2.3.)

2.2. MFN-principle 2.2.1. Overview Cornerstone and one of the pillars of the WTO trading system (Appellate Body, EC-Tariff Preferences, para 101) Main Provision: Article I GATT ‘94 (General Most-Favoured-Nation Treatment, s also II GATS and Art 4 TRIPS): “1. With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.” Further provisions of GATT ‘94 requiring MFN- or MFN-like treatment: Art III (7) (internal quantitative regulations), Art V (freedom of transit), Art III (7) (internal quantitative regulations), Art V (freedom of transit), Art IX (1) (marking requirements)

Art. I:1 prohibits discrimination between like products originating in, or destined for, different countries. Purpose: equality of opportunity to import from, or to export to, all WTO-members. S also Appellate Body in EC-Bananas III, para 190: “The essence of the non-discrimination obligations is that like products should be treated equally irrespective of their origin. As no participant disputes that all bananas are like products, the non-discrimination provisions apply to all imports of bananas, irrespective of whether and how a Member categorizes or subdivides these imports for administrative or other reasons.” Art. I:1 covers not only in law/de jure discrimination but also in fact/de facto discrimination. Even measures that are “origin neutral” can give certain countries more opportunity to trade than others and can therefore be in violation of Art. I:1. Example: EEC-Imports of Beef: An EC-regulation was making the suspension of an import levy conditional (only) on the production of a certificate of authenticity. Formally speaking there were no restrictions on the origin of beef, the regulation was de jure origin neutral. The GATT-Panel found that this regulation was nevertheless inconsistent with the MFN-obligation of Art. I:1 after it was established that the only certifying agency authorised to produce such a certificate of authenticity was an agency in the USA.

2.2.2. Three tier test of Article I:1 GATT’94 Three tier test of consistency: Is the measure at issue conferring a trade “any advantage” of the kind covered by Art. I:1? Are the products concerned “like products”? Is the advantage at issue granted “immediately and unconditionally” to all like products concerned?

“Any Advantage” (1) The MFN obligation concerns any advantage granted by any Member to any other WTO-Member or Non-WTO-Member (!) with respect to (1) customs duties, other charges on imports and exports and other customs matters (2) internal taxes (3) internal regulation affecting sale, distribution and use of products. Generally Art I:1 is very wide. Examples: besides customs duties: import surcharges, customs fees or quality inspection fees, charges on international transfer of payments for imports/exports, method of assessing base value on which the duty or charge is levied, internal taxes and internal charges, etc.

“Like products” (2) The MFN obligation concerns any product originating or destined for any other country and requires that an advantage granted to these products shall be accorded to all “like products” originating in or destined for the territories of all other Members. A discrimination of like products is thus prohibited. Unlike products may be treated differently. Interpretation of “like” is difficult (“like” can have different meanings). Example: GATT-Panel, Spain – Unroasted Coffee: Spain did not apply customs duties on “Colombia mild” and “other mild”, but it imposed them on other types of unroasted coffe (e.g. “unwashed Arabica”). Brazil, which exported mainly “unwashed Arabica”, claimed that the Spanish tariff regime was inconsistent with Art. I:1. The Panel noted that these were considered to be "like products“ –regarding their characteristics, their end-use and the tariff regimes of other Members -, the Panel concluded that the tariff régime as presently applied by Spain was discriminatory vis-à-vis unroasted coffee originating in Brazil. In general PPM (process or production method) are not relevant. Thus products produced in an environmentally friendly manner and those produced in an environmentally unfriendly manner can not be treated differently.

Advantage granted “immediately and unconditionally” (3) The MFN obligation requires that any advantage granted by a WTO Member to imports from any country must be granted “immediately and unconditionally” (no “giving something in return”) to imports from all other WTO Members. Example: Appellate Body, Canada – Autos, para 85: “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.”

2.3. National Treatment 2.3.1. Overview Art III GATT’ 94 (s also Art. XVII GATS, Art 3 TRIPS): “ 1. The contracting parties 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. 2. The products of the territory of any contracting party imported into the territory of any other contracting party 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 contracting party 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. […] 4. The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.” Does not apply to laws/acts governing government procurement and subsidies.

Other National Treatment obligations can be found in the TBT Agreement, the SPS Agreement and the Agreement on Trade-Related Investment Measures. Purpose: Art III prohibits discrimination against imported products. Imported products must not be treated less favourably than like domestic products once the imported product has entered the domestic market. S Appellate Body, Japan Alcoholic Beverages II: “The broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Article III ‘is to ensure that internal measures not be applied to imported or domestic products so as to afford protection to domestic production’. Toward this end, Article III obliges Members of the WTO to provide equality of competitive conditions for imported products in relation to domestic products. ‘[T]he intention of the drafters of the Agreement was clearly to treat the imported products in the same way as the like domestic products once they had been cleared through customs. Otherwise indirect protection could be given’.

Art. III only applies to internal measures, not border measures (like Art. II, tariff concessions or Art. XI, quantitative restrictions). Distinction between internal and border measures is crucial. Not always easy, esp. when the internal measure is applied to imported products at the time or point of importation. E.g. a product is barred at the border because it fails to meet a public health or consumer safety requirement (in this case Art. III is applicable) Example: India – Autos: India imposed an obligation on automotive manufacturers to (1) use a certain proportion of local parts and components in the manufacture of cars and other automotive vehicles and it also imposed an obligation (2) to offset the amount of their purchases of previously imported kits and components, already on the Indian market, by exports of equivalent value. Furthermore it imposed an obligation on these manufacturers to (3) balance their importation of kits and components with exports of equivalent value.

India – Autos (cont’d): The DSB found that (1) and (2) were inconsistent with Art III:4. Furthermore India acted inconsistently with Article XI by imposing (3) on automotive manufacturers. S Panel, India – Autos, para 8.1: India acted inconsistently with its obligations under Article III:4 of the GATT 1994 by imposing on automotive manufacturers, under the terms of Public Notice No. 60 [...] an obligation to use a certain proportion of local parts and components in the manufacture of cars and automotive vehicles ("indigenization" condition); India acted inconsistently with its obligations under Article XI of the GATT 1994 by imposing on automotive manufacturers an obligation to balance any importation of certain kits and components with exports of equivalent value ("trade balancing" condition); India acted inconsistently with its obligations under Article III:4 of the GATT 1994 by imposing, in the context of the trade balancing condition an obligation to offset the amount of any purchases of previously imported restricted kits and components on the Indian market, by exports of equivalent value.”

2.3.2. Art III:1, Art III:2 and Art III:4 Art. III:1 general principle which is elaborated by Art. III:2 (internal taxation) and Art III:4 (internal regulation). Art. III:2: First sentence: obligation relating to internal taxation of “like products” Second sentence: obligation relating to internal taxation of “directly competitive or substitutable products” (competition has to be involved). Effect: S Appellate Body, Canada – Periodicals: First check sentence 1 – if it does not apply then check sentence 2 “ […] the following two questions need to be answered to determine whether there is a violation of Article III:2 of GATT 1994: (a) Are imported "split-run" periodicals and domestic non "split-run" periodicals like products?; and (b) Are imported "split-run" periodicals subject to an internal tax in excess of that applied to domestic non "split-run" periodicals? If the answers to both questions are affirmative, there is a violation of Article III:2, first sentence. If the answer to the first question is negative, we need to examine further whether there is a violation of Article III:2, second sentence.”

Art. III:2 first sentence: obligation relating to internal taxation of “like products”: Three-tier-test: Are the measures internal taxes and other charges of any kind, which are applied directly or indirectly are the imported and the domestic products are like products? Are the imported products are taxed in excess of the domestic products?

(1) Internal taxes (=fiscal measure) which are applied “on or in connection” (directly, indirectly=tax is applied on the processing of the product. No fiscal measure: security deposit (EEC-Animal Feed Proteins) (2) Like product: Example (Japan – Alcoholic Beverages II): Under the Japanese tax system the internal tax imposed on domestic shochu (alcoholic beverage) was the same as that imposed on imported shochu. A higher tax was imposed on imported vodka (but the same as on domestic vodka). The question was, if shochu and vodka were found to be like. The Appellate body ruled that “like products” in the meaning of Art III:2 first sentence should be interpreted narrowly because of the existence of the concept of “directly competitive or substitutable products” of the second sentence of Art III:2. “[…] the Appellate Body affirms the Panel's conclusions that shochu and vodka are like products [and] that shochu and other distilled spirits and liqueurs listed in HS 2208, except for vodka, are ‘directly competitive or substitutable products’ (violation of Article III:2, second sentence).” (3) “In excess of” means “even the smallest amount of ‘excess’ is too much – no trade effects test – “it is irrelevant that the ‘trade effects’ of the tax differential between imported and domestic products, as reflected in the volumes of imports, are insignificant or even non-existent.” (Appellate Body, Japan – Alcoholic Beverages II)

Art. III:2 second sentence: relating to internal taxation of “directly competitive or substitutable products”: Three-tier-test: (1) Are the imported and domestic products directly competitive or substitutable? (2) Are these products similarily taxed? (3) Is the dissimilar taxation applied so as to afford protection to domestic production?

(1) Directly competitive or substitutable? S Appellate Body, Korea – Alcoholic Beverages: “The first sentence of Article III:2 also forms part of the context of the term. ‘Like’ products are a subset of directly competitive or substitutable products: all like products are, by definition, directly competitive or substitutable products, whereas not all ‘directly competitive or substitutable’ products are ‘like’. The notion of like products must be construed narrowly but the category of directly competitive or substitutable products is broader. While perfectly substitutable products fall within Article III:2, first sentence, imperfectly substitutable products can be assessed under Article III:2, second sentence. “ Products are “direct competitive or substitutable, when they are interchangeable, in that they offer alternative ways of satisfying a particular need or taste. Similar to ‘like products’: physical characteristics, common end-use, tariff classifications, the competitive conditions in the relevant market.

(2) Are these products similarily taxed? Opposite to Art III:2 first sentence the tax differential has to more than de minimis S Appellate Body, Japan – Alcoholic Beverages II: “Thus, to be ‘not similarily taxed’, the tax burden on imported products must be heavier than on ‘directly competetive or substitutable’ domestic products, and that burden must be more than de minimis in any given case”

(3) Is the dissimilar taxation applied so as to afford protection to domestic production? Objective analysis of the structure and application of the measure in question on domestic as compared to imported products. Example: The tax measure operates in such a way that the lower tax brackets cover almost exclusively domestic production, whereas the higher tax brackets embrace almost exclusively imported products (domestic production).

Internal regulation is dealt primarily in Art. III:4. Three-tier-test: Is the measure a law, regulation or requirement covered by Art. III:4? Are the imported and domestic products like products? Are the imported products accorded a less favourable treatment?

(1) Laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products Short: Is the sale or use affected? Broadly interpreted: All measures that may modify the conditions of competition. Examples: minimum price requirements applicable to domestic and imported beer; limitations on points of sale; the requirement that imported beer and wine be sold only through in-State wholesalers; additional marketing requirements (e.g. add place of origin or formula of the product); trade related investment measures. (2) Like products see above (3) Treatment less favourable: “effective equality of competitive opportunities”. S Appellate Body, Canada – Provincial Liquor Boards (US): “minimum prices applied equally to imported and domestic beer did not necessarily accord equal conditions of competition to imported and domestic beer. Whenever they prevented imported beer from being supplied at a price lower … they accorded in fact treatment to imported beer less favourable than that accorded to domestic beer.”

Short cases: Newlands (member of the EC) tariff regulation set forth: concerning the importation of German beer a tariff of 3 Newlanddollars per unit, concerning the importation of Austrian beer 4 Newlanddollars. Newlands tax system: 20% tax on domestic red wine, 21% on foreign red wine (alternative: 25 % on foreign white wine). Newland adopts a minimum price requirement for milk applicable for domestic and imported milk. Newland requires its automotive manufacturers to use a certain use a certain proportion of local parts and components and imposes an obligation to balance any importation of certain kits and components The DSB finds that the minimum price requirement is inconsistent with WTO-Law. What are the effects of this decision on national level? An Newland-regulation was making the suspension of an import levy conditional (only) on the production of a certificate of authenticity. The only authority licensed to issue this certificate is situated in X-Land.

2. Rules on Market Access 2.1. Overview International trade needs (predictable and growing) access to domestic markets of other countries. Market access for goods and services from other countries is frequently impeded/restricted by two main categories of barriers to market access: tariff barriers and non tariff barriers (quantitative restrictions, unfair and arbitrary application of trade regulations, customs formalities, technical barriers to trade and governement procurement practices). WTO-law contains four groups of rules regarding market access – different rules apply to different forms of barriers (difference in rules reflects a difference in the negative effects barriers have on trade and on the economy) Rules on customs duties (tariffs) Rules on other duties and charges Rules on quantitative restrictions Rules on non-tariff-barriers (e.g. rules on transparency of trade regulations, technical regulations, standards, sanitary and phytosanitary measures, customs formalities, government procurement practices)

Rules on customs duties: The imposition of customs duties is not prohibited by WTO-law and in fact all members of WTO impose customs duties. WTO law calls upon its members to negotiate mutually beneficial reductions of customs duties (result: tariff concessions or bindings set out in a member’s Schedule of Concession) Rules on other duties and charges: financial charges other than ordinary customs tariffs in the context of importation of a good (import surcharge, security deposit, statistical tax, customs fee)

2.2. Quantitative restrictions A QR is a measure which limits the quantity of a product that may be imported or exported. WTO has a clear preference for custom duties over QR (tariffs are the accepted form of protection). Different types: Prohibition or ban of a product (absolute or conditional) quota: Measure indicating the quantity that may be imported or exported (global quota, bilateral quota – based on number of units, weight or volume and also value) Automatic and non-automatic licensing Other quantitative restrictions (e.g. QR made effective through a minimum price)

Art XI GATT’94: “No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.” Examples: The USA imposed an import ban on shrimp and shrimp products harvested by vessels of foreign nations where the exporting country had not been certified by the US authorities as using methods not leading to the accidental killing of sea turtles above certain levels (Panel, US-Shrimp). The EEC imposed minimum prices on imports (Panel, EEC-Minimum Import Prices). Art XI does not refer to laws or regulations but to measures (legal status of measure is irrelevant) – even non mandatory measures can be a QR (s Panel, Japan – Semi-Conductors)

Further example: (Panel, US-Tuna) To reduce the incidental intake of dolphins by Yellowfin tuna fisheries, the United States enacted the Marine Mammal Protection Act in 1972, which bans imports of Yellowfin tuna and their processed products from Mexico and other countries where fishing methods result in the incidental intake of dolphins. To prevent circumvention, the United States also demands that similar import restrictions be adopted by third countries importing Yellowfin tuna or their processed products from countries subjected to the above import restrictions and prohibits imports of Yellowfin tuna and their products from countries which do not comply with this demand. Japan, the European Union, and others have been targeted by the US measures. The report of the Panel noted that the United States' import prohibitions are designed to force policy changes in other countries and indeed can only be effective if such changes are made. Since these prohibitions are not measures necessary to protect the life and health of animals exempted by nor primarily aimed at the conservation of exhaustible natural resources, the report concluded that the US measures are contrary to GATT Article XI:1, and are not covered by the exceptions in Articles XX:(b) or (g).

Case: In an effort to reduce its trade deficit with Japan, Korea instituted in 1980 a source diversification system for specific imports, as amended by Article 25 of the Executive Order of Korea's Foreign Trade Law of 1987. Article 14(2) of this law authorizes the Minister of Trade, Industry and Energy to approve exports and imports of certain products designated in accordance with standards set forth in a presidential order for the purpose of balancing trade with countries. Under this system, the approval of the Association of Foreign Trading Agents of Korea is required for imports of products exported by the country that had the largest trade surplus with Korea for the last five years (Notice of Ministry of Trade, Industry and Energy Proclamation on Import Source Diversification Article 2). This approval is not normally given. At the outset of its administration, the system applied to Japan, the country having the largest trade surplus with Korea during the previous year. However, when Saudi Arabia became the country with the largest trade surplus in 1982, the system was amended in 1983 to apply to the country with the largest trade surplus "in the past five years." As a result, Japanese products have been continuously subjected to the import restrictions.

(1) This approval is not normally given, thereby functioning as a de facto import ban. This measure is clearly in violation of Article XI of the GATT, which prohibits quantitative restrictions. (2) As quantitative import restrictions are applied in a discriminatory fashion against a specific country, the system is inconsistent with Articles I and [XIII] of the GATT, which require the non-discriminatory administration of such restrictions.