Treatment of like products under GATT and WTO rules

¶ … treatment of like products under GATT

GATT: The General Agreement on Tariffs and Trade, 1994

Composed of 37 articles and a number of explanatory understandings and addenda

Most important articles are I and III: non-discrimination and like products, respectively

Also, articles I and III are the legal homes of the core principles of GATT: most-favored nation status and national treatment

All under the heading of the World Trade Organization's disciple of non-discrimination

Article I establishes most-favored nation rule.

Parties must pledge that if special treatment given to goods and/or services of one country, then same special treatment must be given to all WTO members in the world.

No single country should receive favors that disrupt trade.

That is because states had different tariff levels for different countries, and this provision was designed to reduce those disparities. Today, the principle has been extended to other potential barriers to trade.

The rule has two major exceptions: first applies to regional trade agreements, second to developing countries.

Regional trade agreements mean that tariffs may be established between the parties to these agreements.

The second exception generally means the least developed countries.

GATT allows members to apply preferential tariffs, or even zero tariff rates, to products coming from these countries, while they still have higher rates for like products from other countries.

GATT has this exception to help promote economic development where it is most necessary.

Article III, on the other hand, establishes the national-treatment rule.

National treatment rule requires that the products of other nations be handled the same way as like products manufactured in the importing country.

No domestic laws may be applied to imported products to protect national producers from the competing like products.

Also, these imported products should receive treatment under national laws that is no less favorable than the treatment given to like domestic products

Defining Like Products

Defining like products entails critical environmental implications.

For instance, if you take two circuit boards, one produced in a way that emits ozone depleting substances, and another produced in a non-polluting way: are these products alike?

If they are "alike," then environmental regulators can't give preference to the environmentally friendly product over the polluting product if it appears at the border in competition with domestic environmentally clean product.

The WTO doesn't specifically define the term "like," which seems to create a solution by creating a problem.

The organization's dispute resolution system has tackled the issue several times, and has finally developed some criteria:

End uses in a given market

Consumer tastes and habit

The product's properties

Nature

Qualities

Most recently, the dominant criterion: like products test: commercial substitutability.

In other words, do the two goods compete against each other in the market as substitutes?

E.g.: Although vodka and gin are not identical, their physical properties (alcoholic content) and end use (drinking) are similar enough that they could be substitutes for one another therefore like products.

Specific examination of like product rule term "like products" appears in several different GATT provisions does this mean that it means different things in different GATT provisions?

This is not true, however:

Like products are defined on a case-by-case basis

In last decade, a new effort to redefine like product under Article III

Two GATT panel decisions ruled that like product was to be defined in terms of two questions that were only indirectly connected to the issue of likeness:

Did product distinction have the aim of producing domestic industry?

Did product distinction have the effect of producing domestic industry?

In other words, to a large extent, definition of like product changed.

However, these sorts of liberal interpretations have been shot down:

In 1996 the WTO Appellate Body rejected the aim and effects definition.

Instead, encouraged dispute panels to return to more conventional, black-letter definitions.

Latest argument:

There should be difference given to meanings given to like product concept under Articles I and III.

Like products under Article I should mean:

Allow rather fine distinctions between products

When applied to product definitions defined by tariffs.

Should not apply when product definitions defined by internal regulations or internal taxes.

Like products under Article III should mean:

Deal intrinsically with most favored nation status.

Big question:

How many dimensions should likeness deal with?

In other words, is an apple like another apple if it is edible;

because of its color, because it is simply like it;

because it weighs as much;

because it comes from the same region of a country or because it comes from the same country;

or even because it's produced organically?

How do we construct the legal ruling?

The one-dimensional "likeness" scale works best,

But only when the closer one of the two standards being compared is a standard requiring nearly identical qualities

Must, however, specify criteria:

Once criteria developed with care, then can discuss degrees of likeness within boundaries of those criteria or characteristics

First, physical characteristics:

More products have similar physical traits, the more similar they are Critics say this is a sterile concept in a policy sense:

It is usually difficult to understand why a difference in this or that physical characteristic, as such, should dictate that two products need not be treated the same.

High degree of physical similarity can be helpful, but has limits

The greater the physical similarity between two products, the more likely they are interchangeable

Often, this is the first criteria legal decisions under GATT look to In other words, physical criteria is the start of any GATT like product analysis by any of the governing bodies

After the question of physical similarity answered,

The legal decisions move onto other characteristics.

Next, since GATT is a commercial agreement,

Likeless should be defined as a commercial concept.

First commercial concept: competitiveness.

After all, goal of GATT Article I and III involves rules of prohibiting differences in treatment between certain products;

This is to prevent distortions in competition between otherwise competitive goods.

Logical candidates for production are producers of goods that are:

1) competitive

2) with harmful imports

Several components of competitive:

Sustainability:

Extent to which consumers perceive two products as functionally equivalent;

Measured by consumer's willingness to substitute one for the other;

This willingness is in turn measured by the extent to which relatively small changes in price affect consumer preferences for one or the other.

Functional Likeness:

Extent to which two products do in fact perform the same functions;

For instance, sweeping dirt. Is that both product's function?

Also,

Extent to which two products are made from the same raw materials;

In the same establishments;

By the same capital goods;

Or by the same workers.

Policy as it affects definitions and application of Like Products general policy behind GATT: govt's should not employee internal measures - internal taxes or internal regs - to give protection to domestic industry

This is best served by competitiveness definitions of like product,

Not well served by physical characteristics

Extent to which consumers are willing to choose the foreign product in substitution for domestic product is paramount, and this is well defined by competetiveness

This is reflected in tariff policy

Non-discrimination policy with regard to tariffs, in particular, under GATT

Here, policies clouded

GATT policy of allowing govt's to maintain tariffs is a policy to allow a market distortion

So, no overall no-distortions policy one can appeal to for guidance, en re, treatment of tariffs

Overall goal not chastity

Goal is actually:

Orderly management of protection in order to contain its effects and remove any unnecessary evils

Since tariffs are a legal player,

Tools of tariffs must also be legal

Under GATT, governments must be able to manage a policy of tariff protection:

Need to be able to draw lines between products in order to:

Confine protection to those imports which threaten domestic producers;

And also to confine tariff liberalization to the imports which it would be ok to remove protection:

Domestic industry would still survive

Also, GATT policy encourages negotiation to lower tariffs;

So, not only consistent tariffs, but consistent tariffs with an end to diminishing them across the board

So:

Governments must conduct such negotiations on the reciprocity principle under GATT:

Governments are expected to pay for the market opportunities created when other governments lower their tariffs, by lowering their own tariffs in return, under GATT.

Does this mean on like products, or not necessarily?

This is not known.

However, under GATT,

As long as everyone contributes equally by lowering tariffs, reciprocity policy can be consistent with overarching anti-discrimination policy, mandated by GATT

But when reciprocal payment not made, reciprocity policy requires that the non-paying party be denied the benefit of the tariff concessions for which it didn't pay;

This way, you can discriminate against free riders.

That's why the tariff negotiations under reciprocity may be in deep conflict under GATT's like product rule with non-discrimination rules

Like products: specific examples fine product distinctions are key for tariffs and like product determinations under GATT rules defined by established practice guiding principle:

tolerance for any distinction based on an objective characteristic of the products in question broad range of objective characteristics here are some:

differences in materials of constructions differences in method of manufacture scientifically recognized distinctions between plant or animal species differences in value differences in shape, size, dimension quality distinctions; for example, differences in thread counts of textiles.

Distinctions can be found in trade-neutral taxonomic motivations, also, and many other contributors such as environmentalists, child-labor activists, etc., so it is more an art than a science

Case of pharmaceuticals: Jordan and U.S.

In trade between Jordan and U.S., U.S. is a highly developed country, and Jordan is a developing nation.

Free trade agreement between Jordan and U.S.

US has highly sophisticated Big Pharma manufacturers

Jordan is just starting out in pharmaceutical production

US pharma firms have international reputation, bolstered by years of production and exportation

Jordanian firms must first put in all the R&D investment to create a product, then have extra marketing dollars to spend to gain international reputation necessary for exporting

Also, according to Jordan Times,

And J-Advil will continue to get sold only in Jordan

The U.S. internal governmental organizations have a huge influence and larger impact in importation, as we have seen in the latest debates over drugs from Canada.

The FDA will surely define J-Advil as different since it's undergone different - if not lesser - testing in the Jordanian R&D system.

US drugs are subjected to rigorous Phase I, II and III trials.

If the Jordanian drugs have not gone through the same exact system - even if their system is equivalent in its scope - are these not two different products under the FDA, and thus under GATT, effectively?

The U.S. consumers will surely not buy a drug that has not gone through the same testing as domestic Advil, even if the FDA allows it to reach the nation's pharmacies.

As a result, the testing of the drug is another characteristic that will define competitiveness and therefore like product status under Articles I and III of GATT.

This factor is unique, in some ways, to pharmaceuticals.

Then there is the issue of production.

If, for instance, Jordan employees lower cost labor or even child labor to produce its pharmaceuticals, in this case, J-Advil,

Should the product be treated as a like product under Articles I and III of GATT if it is manufactured differently?

Apparently not, according to the tariff criteria:

Let us examine the various other inputs into determining like product status restated below with regard to Advil and J-Advil:

differences in materials of constructions: What has gone into the Jordanian drug? The casing, the packaging? Does that mean the good is similar to Advil?

A differences in method of manufacture: Here we hit what was touched upon above: Who manufactured the good, and how? In factories with good labor conditions, forced labor, child labor, underpaid labor, highly skilled or unskilled labor? All of these factor in.

A scientifically recognized distinctions between plant or animal species: The easiest question: is there a difference in the chemical makeups of Advil and J-Advil. If yes, then they're not like products.

A differences in value: This is a harder question: Is there a higher value intrinsically to American drugs? And if so, does that mean that Jordanian drugs are not like products? This seems to fly against economic principles but may not fly against the principles in GATT differences in shape, size, dimension: dealt with above quality distinctions: dealt with above Conclusion

There are so many factors that are in play in Jordan vs. U.S. In GATT free trade on pharmaceuticals.

It is hard to determine whether drugs will be considered like products without submitting to the panels at GATT and WTO

However, one thing is certain:

Without tariffs; in essence, with free trade; Jordan will have a nearly impossible time penetrating the U.S. market

SO, the reciprocity agreements in GATT will serve to squelch the fledgling Jordanian pharmaceutical export industry.

Sources

Al Wakeel, Dina. U.S. war on Iraq to deal Jordanian pharmaceuticals heavy blow. Jordan Times. Feb. 18. 2003. http://www.iisd.org/trade/handbook/3_4_1.htm

Hudec, Robert. Like Product: The differences in the meaning in GATT Articles I and III. University of Michigan Free Press. 2000. http://www.jordanembassyus.org/11272002007.htm