‘Like Product’ Test under Article III:2

Article III:2 contains two different standards of National Treatment. Under the first sentence of III:2, imports must be taxed identically to ‘like’ domestic products. Under the second sentence of III:2 imported products must not be taxed dissimilarly from directly competitive or substitutable domestic products so as to afford protection to domestic production.

Art III:2 first sentence reads that: ‘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’.

It is important to note that the Art. III:2, first sentence concerns only taxes that are imposed on ‘like products’. The provision is applicable to ‘internal taxes and other charges of any kind’ such as sales taxes and excise duties and especially to value added taxes (VAT). The Art III:2, first sentence does not cover income taxes or import since they do not constitute internal taxes on products.[1] However, the purpose pursued by a Member State imposing the tax measure is irrelevant to constituting a violation of national treatment obligation within the meaning of Article III:2. Consequently, the ‘aim and effect’ test in assessing the likeness of products was rejected by the WTO Appellate Body[2].

The Article, as interpreted by the AB, provides a two-tier test to determine the violation of national treatment obligation. First, it must be demonstrated that the imported and domestic products are ‘like products’, and then that the imported products are taxed in excess of the taxes applied to domestic products.

As mentioned above, there is no official definition for the notion ‘like product’ under the GATT. Nevertheless, many decisions of GATT/WTO dispute settlement bodies have provided a guidance to determinate the standard of likeness included in Article III:2, first sentence.

In the Japan- Alcoholic Beverages II case, the WTO Panel and Appellate Body examined the scope of the phrase ‘like products’ in the Art. III:2 fist sentence. The question, which involving the dispute concerning whether vodka and Japanese alcohol shochu can be considerated to be ‘like products’. The Appellate Body started the examination with the clarification that the likeness standard under Art:III:2 first sentence must be narrowly interoperated:

‘Because the second sentence of Article III:2 provides for a separate and distinctive consideration of the protective aspect of a measure in examining its application to a broader category of products that are not ‘like products’ as contemplated by the first sentence, we agree with the Panel that the first sentence of Article III:2 must be construed narrowly so as not to condemn measures that its strict terms are not meant to condemn. Consequently, we agree with the Panel also that the definition of ‘like products’ in Article III:2, first sentence, should be construed narrowly’[3].

Moreover, the Appellate Body stated that the three criteria developed in Border Tax Adjustments[4] should be taken into account for determining the concept of ‘likeness’ under Art III:2 first sentence. In particular, ‘like products’ are products, which would have common end-uses, essentially the same physical characteristics (nature and qualities), and likely to have been designed for the same readership with the same tastes and habits.

However, the proof of ‘like products’ always involves ‘an unavoidable element of individual, discretionary judgement’[5] and there is no one approach to exercising judgement, which will be appropriate for all cases. Consequently, there is no single precise and absolute definition of ‘likeness’ standard and these criteria have only an exemplary character.

In addition, in the same case, the Appellate Body proposed to use the forth factor- a tariff classification to determine ‘like product’ concept. These classifications based on the Harmonized System were fully recognized in the practice by the GATT/WTO Members. The AB argued that uniform and detailed tariff nomenclatures of products provide a practical basis for specify ‘like product’ and thus can be relevant in regulating what are ‘like products’ under Art. III;2 first sentence. However, there are risks in using tariff bindings that are too broad as a measure of product ‘likeness’, so these determinations need to be made on a case-by-case basis.[6]

In the Canada – Periodicals case[7], the Appellate Body further clarified that ‘like products’ should endorse ‘perfect substitutability’ and in effect, the physical characteristics are crucial (although not exclusively) to establish the likeness between an imported product and a domestic product.[8]

[1] United Nations Conference on Trade and Development, Dispute Settlement, World Trade Organization, 3.5 GATT 1994, New York and Geneva 2003, p. 22.

[2] Appellate Body Report, Japan – Alcoholic Beverages II, p. 16.

[3] Appellate Body Report, Japan – Alcoholic Beverages II, pp. 19-20.

[4] Report of the Working Party adopted on 2 December 1970 (L/3464)

[5] Appellate Body Report, Japan – Alcoholic Beverages II, pp. 19-20.

[6] Appellate Body Report, Japan – Alcoholic Beverages II, pp. 21-22.

[7] Appellate Body Report, Canada – Periodicals, pp. 27 ff;

[8] Appellate Body Report, Korea – Alcoholic Beverages, para. 10.66 and Appellate Body Report, Chile – Alcoholic Beverages, para. 7.51

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