Treatment of Like Products Under

¶ … 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,

US war on Iraq to deal Jordanian pharmaceuticals heavy blow

Jordan's pharmaceutical manufacturers suffered a heavy blow following the 1991 Gulf War and are getting hit heavily now again in the latest Iraq international dispute let by the U.S.

A possible blockade of both land and air routes could damage the industry," says Hikma Pharmaceuticals Chairman Mazen Darwazeh. Of course, this has come to pass.

A cutting off of passageways to Jordan would lead to a delay in the import of raw materials needed to manufacture the drugs.

Consequently, shipments to be delivered to international markets would also be delayed.

A majority of the Jordan's 17 pharmaceutical companies conduct trade with sanctions-struck Iraq.

In the early 1990s, only six companies operated in Jordan exporting around $50 million worth of their products to Iraq. At the time Jordanian pharmaceutical firms controlled the lion's share of the medicines trade to Iraq, it's neighbor.

Last year, of the total $200 million in Jordanian pharmaceutical exports, only $20 million, or 10 per cent, were exported to Iraq.

This is because of the Iraq war that the U.S. started, with which Jordan had no dealings at all.

At the same time, pharmaceuticals is a major industry for Jordan, and a great area for the developing country to build its exports:

Pharmaceuticals are a major foreign currency earner. Last year, at a total of JD142 million, pharmaceuticals ranked second on Jordan's list of exports after clothing. Some 60 per cent of production is exported while the remainder is consumed locally.

But already it is at a disadvantage because a GATT free trade trading partner is sabotaging its efforts to build its pharmaceuticals exports through a war with its neighbor.

As a backdrop, is it fair, then, for there to be no tariffs, or most-favored nation trading, on pharmaceuticals between U.S. And Jordan?

Which country does it help, or does it help both?

From the political / global perspective, the free trade in like product pharmaceuticals harms Jordan.

First, without dealing with the Iraq war,

Jordan has a fledgling industry, which is large by its own standards, but absolutely negligible compared to the U.S. pharmaceutical standards both internationally and domestically

So if Jordan is to produce a like product to a U.S. product (say, Advil), it's start up costs are significantly higher

Also, it'll have to spend the marketing dollars to get its product (say, J-Advil) known abroad

Already, without tariffs, Jordan is suffering

Then there is the idea that the U.S. started a war with Iraq that will further compromise Jordan's power to be competitive:

Jordan loses its major source of pharmaceutical revenue in Iraq, so it has that much less money to reinvest in R&D to make its J-Advil competitive with Advil, and then market the product abroad.

Without tariffs to protect its fledgling industry, an industry that has been veritably attacked by its major competitor, the U.S., it has no hopes of selling J-Advil in the U.S.

Of course, under GATT free trade, if it were to impose tariffs on Advil, U.S. would reciprocate with tariffs on J-Advil;

So the advantage would be lost

There are the like products issues too

Is it even possible, or is it advisable, for Advil and J-Advil to construed as like products under GATT?

First, the procedure.

Physical characteristics first.

Here, highly irrelevant. A pharmaceutical is rarely purchased based on its appearance, save perhaps the difference between capsules, tablets and syrups to be consumed.

But then again, maybe it is an issue:

If J-Advil is a tablet, and Advil is a capsule, are they like products?

Depending on how the WTO / GATT dispute resolution panels rule, they may or may not be, depending on the next factor:

List of 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.

First, end uses in a given market:

Both Advil and J-Advil would be used, presumably, exactly for the same purposes in the U.S. And in Jordan

Consumer tastes and habit: This question links closely with our earlier discussion of tablet/capsule/syrup. How is the pharmaceutical from Jordan presented? Will that change consumption and the nature of what type of product it is in the American marketplace, due to particularities of American consumers' tastes and habits?

The product's properties: Here, ostensibly similar; as the two drugs are made up of the same active ingredients.

Nature: redundant, following tastes and habit discussion

Qualities: are there other factors that influence consumers' buying decision, that should be taken into account in determining like product nomenclatures under GATT?

Commercial substitutability is the key.