As regard to the criteria of Border Tax the Appellate Body in the EC-Asbestos case hold that competitive relationship is highly relevant and both necessary and sufficient for determination of likeness standard under Art III:4 and therefore regulatory purposes are irrelevant. National treatment principle can be applicable only with respect to ‘like products’ being in a close competitive relationship in the marketplace. Consequently, protectionist measures can be possibly applied only with the purpose of affecting the significant situation in the market of such products. The Appellate Body stated as following:
As previously pointed, the ‘like product’ terms of Article III:4, although broader than the first sentence of Article III:2, is certainly not broader than the combined product scope of the two sentences of Article III:2.
The EC-Asbestos case constitutes a guideline for the determination of the criteria of ‘like products’ within the meaning of Article III:4. First, the Appellate Body highlighted that the Report of the Working Party on Border Tax Adjustments outlined an approach for analysing ‘likeness’ standard under Art III:4. This traditional method has been developed ipso facto by several rapports of WTO Panels and the Appellate Bodies with regard to Art III:2. In analysing ‘likeness’ it should be taken into account the four general criteria such as:
The Art III:2 and Art III:4 cover the prohibition of discrimination concerning similar imported and domestic products. The inadmissible discrimination exists if either the same products are treated dissimilarly or if goods beyond the product-related criteria are discriminately treated, so as to afford protection to domestic production. The textual concept of ‘like product’ in Article III:2 may suggest a similarly narrow reading of ‘like product’ in Article III:4, since both provisions form part of the same Article. Hence, the question arises of what is the relationship between ‘like products’ under Art III:2 and Article III:4.
Article III:4 of the GATT is considers to be a cornerstone of the multilateral trading system, defining the approach of the system to domestic regulation which may have an effect on trade.
The national treatment obligation of Article III:4 dealing specifically with internal laws and regulations provides that:
The notion of ‘directly competitive or substitutable products’, similar to ‘likeness’, raises considerable interpretation difficulties. There is neither systematic definition nor guidance to determinate the term. In the Japan-Taxes on Alcohol II case, the Appellate Body held that the specification of directly competitive or substitutable products must be made on a case-by-case basis taking into account all the relevant facts.
It is important first to note that the notion of ‘directly competitive or substitutable products’ is broader than the category ‘like products’ in Article III:2, first sentence. In effect, ‘all like products are, by definition, directly competitive or substitutable products, whereas not all directly competitive or substitutable products are like’. In addition, in the of Canada – Periodicals case, the Appellate Body state that products must not to be perfectly substitutable in order to be ‘directly competitive or substitutable’, because a case of ‘perfect substitutability’ falls only under Article III:2, first sentence. This imperfect substitutability is a sufficiently strong relationship for the broader prohibition of the second sentence.
In the Japan-Taxes on Alcohol II case, the Panel emphasized the need to look not only at such matters as physical characteristics, common end-uses, and tariff classifications, but also at the ‘marketplace’, which constitutes the relevant criterion since what was at issue was the responsiveness of consumers to the various products offered in the market.
In the Korea – Alcoholic Beverages case the criteria of directly competitive or substitutable products’ played a crucial role. First, the Appellate Body confirmed that by determination of the term it is important to take into consideration the ‘marketplace’ factors. For this standard, the question of substitutability from the consumers’ perspectives is given considerably more weight than the factors of physical characteristics and tariff classifications.
Such interpretation of the criteria evoked a considerable discussion in the literature since the national treatment obligation finally reaches even those product relationships, in which the two products can share absolutely no physical similarity with each other, as long as they appeal to the consumers as ‘directly competitive or substitutable’.
The Appellate Body considered that the products fall under the definition if they are interchangeable or if they offer alternative ways of satisfying a particular need or taste. Furthermore, the Appellate Body held that when analysing whether products in question are ‘directly competitive or substitutable’, an analysis of latent as well as extant demand is required, because ‘competition in the market place is a dynamic, evolving process’ and therefore consumer behaviour could be influenced by protectionist internal taxation.
To establish ‘directly competitive or substitutable products’ the Appellate Body proposed as well an examination of the cross-price elasticity of demand in that market. Cross-price elasticity analysis assumes to predict the change in demand that would result from a change in the price of a product following from a change in the relative tax burdens on domestic and imported products. Both criteria ‘present direct competition’ and ‘a strong potentially direct competitive relationship’ are significant to determinate the likeness standard under Art III:2 second sentence.
As a consequence to show whether two products are directly competitive or substitutable, the WTO Panel and Appellate Body can look at factors like cross-price elasticity, elasticity of substitution, end-uses, consumers’ tastes and habits, and the products’ properties and nature. The list of relevant criteria is not exhaustive and other factors might be added.
This approach has meet considerable critic in the doctrine. Many commentators argue that consumer perceptions of differences between products cannot be dismissed just because they are created through advertising, even if the products at hand are physically identical, because there will be no protective effect of lower taxation of domestic products if consumers, for whatever reason, do not see a product as similar.
 Appellate Body Report, Korea – Alcoholic Beverages, para. 118.
 Appellate Body Report, Canada – Periodicals, p. 28.
 Appellate Body Report, Japan – Alcoholic Beverages II, p.24
 Diebold N. F., Non-Discrimination in International Trade in Services, ‘Likeness’ in WTO/GATS,p. 108
 Choi W.-M.,‘Like Products’ in International Trade Law: Towards a Consistent GATT/WTO Jurisprudence p. 109.
 Appellate Body Report, Korea – Alcoholic Beverages, para. 114-116.
 Ibid. para. 120.
 Ibid. para. 137.
 Horn H., Mavroidis P.C., Still hazy after all these years: the interpretation of national treatment in the GATT/WTO case law on tax discrimination, p. 45
Article III:2, second sentence provides: ‘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.’
As mentioned above, the reference to Article III:1 establishes the general principle which assumes that internal taxes and other internal charges should not be applied to imported or domestic products so as to afford protection to domestic production. Continue reading Standard of ‘likeness’ in Art III:2, second sentence
A literary interpretation of Article III:2 assumes that there are two separate obligations of national treatment and only the second sentence specifically refers to Art. III:1. The notion ‘as to afford protection’ included in Art III:1 has no substantive meaning in Art. III:2 first sentence and therefore the provision of Art III:2, first sentence has no explicit reference to the general principles against protectionism of Article III:1. Continue reading ‘Like Product’ : the relationship between Article III:1 and Article III:2, first sentence